Laureate Education, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; financial amounts below are in U.S. dollars. Laureate provides higher education through an international portfolio of institutions. Reported results primarily reflect continuing operations; divestiture-related operations are presented separately.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $528.6 million | $601.1 million |
| Operating loss | $117.1 million | $92.0 million |
| Adjusted EBITDA, non-GAAP | $(36.9) million | $(29.6) million |
| Income (loss) from continuing operations | $124.1 million | $(117.1) million |
| Net income attributable to Laureate | $99.6 million | $191.2 million |
| Operating cash flow | $(3.5) million | $45.0 million |
- Revenue fell 12%. Management attributed the decline principally to foreign exchange (down $40.5 million) and product mix, pricing and timing (down $21.8 million, primarily the Andean academic calendar), with lower average organic enrollment also contributing.
- Operating loss widened by $25.1 million. Adjusted EBITDA loss widened by $7.3 million; the non-GAAP measure excludes specified costs, including $30.4 million of EiP implementation expenses.
- Continuing-operations income included a $235.1 million income-tax benefit, driven mainly by a discrete benefit of approximately $222 million from a tax-basis step-up of intellectual property in the Netherlands. The company recorded a $111.2 million pretax loss from continuing operations. Reported net income also reflects discontinued-operation results and sale losses.
- Interest expense was $36.1 million, down from $54.7 million, primarily due to lower average debt balances. Foreign-currency exchange produced a $35.9 million gain versus a $4.7 million loss in Q1 2019.
- Segment results were mixed: Andean revenue fell 36% and its Adjusted EBITDA loss widened to $62.2 million, largely reflecting semester timing and currency effects. Brazil revenue fell 24%, while its Adjusted EBITDA loss narrowed. Rest of World revenue rose 31%; Mexico revenue declined 1%; Online & Partnerships revenue fell 3%.
Financial position, liquidity and cash flow
- At March 31, 2020, cash and cash equivalents were $546.7 million and restricted cash was $196.4 million. Cash plus restricted cash totaled $743.1 million. Restricted cash is not generally available for ordinary operations; some cash is held by foreign subsidiaries and VIEs and may be restricted in use.
- Total current assets were $1.312 billion versus current liabilities of $1.311 billion. Receivables, net, were $383.0 million; deferred revenue and student deposits were $505.7 million.
- Total long-term debt and finance leases were $1.666 billion, including $800 million of Senior Notes due 2025 and $409.1 million outstanding under the revolving credit facility. The company fully drew the $410 million revolver in March to preserve liquidity amid COVID-19. It reported compliance with its leverage covenant at quarter-end.
- Operating cash flow was negative $3.5 million; investing cash outflow was $24.0 million; financing cash inflow was $267.9 million. Cash and restricted cash increased by $216.5 million, substantially reflecting the revolver draw. Capital expenditures were $28.1 million, including discontinued operations.
- Management stated that available cash and operating cash flow were expected to meet operating and liquidity needs for at least the next 12 months, while noting that prolonged disruption could affect operating cash flows and access to liquidity.
Material changes, outlook and notable items
- COVID-19 prompted a shift of campus-based instruction to online delivery. The company said future effects on enrollment, tuition pricing, collections and potential impairments could not yet be quantified; no material effect from its accounting-estimate assessment was recorded for Q1.
- The Board’s January 2020 strategic review covers potential sales, spin-offs or business combinations for remaining businesses. The review was progressing more slowly than anticipated due to COVID-19 and market conditions; no outcome or transaction is assured. Management provided no specific earnings or revenue guidance.
- Laureate completed sales of Costa Rica operations and NSAD during the quarter, recording pretax sale losses of approximately $17.2 million and $5.7 million, respectively. A Malaysia sale agreement for $140 million, including payment for a minority interest, remained subject to closing conditions, including regulatory approval.
- Discontinued operations generated a net loss of $25.8 million, including a $22.0 million loss on sales, compared with net income of $311.3 million in Q1 2019, which included significant sale gains. Discontinued-operations revenue declined to $33.2 million from $223.3 million.
- Other notable exposures include a maximum potential Chilean student-loan guarantee of approximately $430 million, against which $38.0 million was recorded as an estimated liability; reasonably possible unrecorded tax-related losses in Brazil of up to approximately $42 million; and a preliminary Spanish tax assessment of approximately $23.9 million that the company intends to challenge.
Investor verification points
- Assess the sustainability of reported profit given the large, discrete tax benefit and the continuing-operations pretax loss.
- Track enrollment, tuition collections, bad debts and the effects of online instruction as pandemic impacts develop.
- Review liquidity availability, debt maturities, covenant headroom and the effect of the full revolver draw, distinguishing unrestricted cash from restricted or locally limited cash.
- Monitor progress and terms of the strategic review and remaining divestitures, including the Malaysia transaction and any related impairment assessments.
- Follow Andean segment performance, foreign-exchange movements, Chilean student-loan guarantees and the Spanish and Brazilian tax contingencies.