Laureate Education, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; amounts below are USD millions except per-share data. Laureate operates a global higher-education network; it reported 1.07 million students across 69 institutions in 25 countries.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,277.4 | $1,231.9 | $2,133.4 | $2,138.4 |
| Operating income | $243.9 | $210.6 | $181.0 | $199.4 |
| Operating margin | 19.1% | 17.1% | 8.5% | 9.3% |
| Net income (loss) | $117.1 | $349.2 | $(3.3) | $246.8 |
| Net income (loss) attributable to Laureate | $116.4 | $347.4 | $(6.4) | $244.2 |
| Net income (loss) available to common stockholders | $47.2 | $347.0 | $(114.5) | $245.3 |
| Basic and diluted EPS | $0.28 | $2.60 / $2.59 | $(0.71) | $1.84 / $1.83 |
| Adjusted EBITDA (non-GAAP) | $341.9 | $308.2 | $390.4 | $382.1 |
Q2 revenue increased 4%; six-month revenue was essentially flat. Q2 Adjusted EBITDA rose 11% and six-month Adjusted EBITDA rose 2%. These non-GAAP figures exclude specified items and should be considered alongside GAAP results.
- Cash flow: Six-month operating cash use was $205.7, versus $63.4 used in 2016. Investing cash use was $95.7, compared with $227.7 provided in 2016, which included sale proceeds. Financing provided $188.4, including IPO proceeds. Cash and cash equivalents declined $97.8 to $367.2.
- Margins and segments: Q2 LatAm revenue rose 13% and Adjusted EBITDA rose 34%; EMEAA revenue fell 6% while Adjusted EBITDA was roughly flat; GPS revenue fell 15% and Adjusted EBITDA fell 16%. For the six months, LatAm Adjusted EBITDA increased 30%, EMEAA decreased 1%, and GPS decreased 12%. Consolidated margins were affected by segment mix and corporate costs.
- Liquidity: Current assets were $1,242.5 and current liabilities $1,415.2 (current ratio approximately 0.88). Cash was $367.2, with a further $193.3 of restricted cash and investments. Management said available cash and operating cash flow should meet current operating requirements for at least 12 months. Much of the cash was held by foreign subsidiaries; VIE cash is generally restricted to those entities’ operations.
- Debt: Total long-term debt, including current maturities, was $3,616.1, down from $3,853.0 at year-end 2016. The company refinanced its credit facility and redeemed most 9.25% notes due 2019; new financing included $800.0 of 8.25% notes due 2025 and a $1,600.0 term loan due 2024. The $385.0 revolving facility had no borrowings at quarter-end. The term loan rate was 5.73% at June 30. The refinancing generated $6.9 of extinguishment loss and $22.8 of modification costs.
Material changes and unusual items
- Prior-year reported earnings included a $243.3 gain on the 2016 sale of hospitality-management-school operations. This was a major reason Q2 2016 and first-half 2016 net income exceeded 2017; comparisons are also affected by 2016 dispositions that reduced current-period revenue.
- Q2 2017 included a $27.0 derivative gain, primarily from remeasurement of Series A preferred-stock redemption features, and a $9.7 foreign-exchange loss. For the first six months, the derivative gain was $39.1 and foreign-exchange loss was $7.4.
- First-half common-stockholder earnings were reduced by $108.1 of accretion for Series A preferred stock and other redeemable interests. The IPO in February raised $456.6 net; the company also received $55.3 net from the final preferred-stock funding.
- Revenue comparisons included about $30.0 recognized in 2017 after Chilean class disruptions deferred revenue in 2016. First-half 2017 revenue was also reduced by about $11.9 from flooding-related disruptions in Peru; classes resumed and management expected completion by the end of Q3.
- Management attributed much of LatAm growth to enrollment, pricing/product mix and currency effects. Organic enrollment excluding dispositions rose 3% in LatAm and 6% in EMEAA in Q2; GPS declined 5%.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance was provided. Management stated that cash and operating cash flow were expected to cover operating needs for at least the next 12 months.
- A proposed Chilean higher-education bill could impose stricter governance and related-party transaction rules. If enacted substantially as described, Laureate estimated annual consolidated Adjusted EBITDA could decline by approximately $50, or about 40% of its current Chile Adjusted EBITDA; management cited a possible two-to-three-year implementation window. The bill remained subject to Senate consideration and constitutional challenges.
- Turkish regulator YÖK findings concerning Bilgi University included reduced admissions quotas and demands for approximately $29.0 of reimbursements, plus about $8.0 in other amounts. Laureate and Bilgi disputed the findings and pursued appeals. Deconsolidation of Bilgi, if required, could materially affect results; Bilgi generated approximately $106 of Laureate revenue and $26 of operating income in 2016.
- A Chinese civil case involving Hunan International Economics University alleges a loan guarantee of approximately $29.0. Management assessed a loss as reasonably possible but not probable at June 30 and recorded no liability. The company also disclosed tax, student-financing guarantee and other legal exposures, including a maximum potential Chilean student-loan guarantee of approximately $496.0; the recorded estimated liability was $27.9.
- Disclosure controls and procedures were reported ineffective because four previously disclosed material weaknesses had not been fully remediated. Management said remediation had begun and stated that the financial statements fairly presented the periods shown.
- Other risks include foreign exchange and political/regulatory exposure, seasonality, student enrollment and retention, competition, acquisitions, and the ability to remediate internal-control weaknesses. A new six-segment structure was scheduled to take effect August 1, 2017.
Key facts investors should verify
- Whether operating cash use and working-capital movements improve, and how much cash is accessible outside restricted or VIE accounts.
- Debt-service capacity and compliance with credit-agreement covenants as thresholds tighten; assess refinancing costs and variable-rate exposure.
- Progress on the four material weaknesses and whether disclosure controls become effective.
- Final outcomes and financial effects of the Chilean bill, Bilgi/YÖK dispute, HIEU litigation, and tax contingencies.
- Underlying enrollment, revenue and margin trends by segment, separating organic performance from currency, prior-year dispositions, and timing effects.