Laureate Education, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited; amounts below are U.S. dollars in millions unless noted.
Business context
Laureate operates an international higher-education network. At quarter-end it reported 60 institutions in 20 countries and approximately 1.041 million students. Its six segments are Brazil, Mexico, Andean & Iberian, Central America & U.S. Campuses, EMEAA, and Online & Partnerships. The company continued divesting businesses as part of a portfolio simplification plan.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,247.9 | $1,277.4 | $2,133.2 | $2,133.4 |
| Operating income | $265.8 | $243.9 | $238.3 | $181.0 |
| Net income (loss) | $224.0 | $117.1 | $395.5 | $(3.3) |
| Net income (loss) attributable to Laureate | $224.4 | $116.4 | $393.3 | $(6.4) |
| Adjusted EBITDA (non-GAAP) | $361.2 | $341.8 | $408.7 | $390.4 |
- Q2 operating margin was approximately 21.3%, versus 19.1% a year earlier; first-half operating margin was approximately 11.2%, versus 8.5%.
- Q2 diluted EPS was $1.00 (basic $1.37); first-half diluted EPS was $1.75 (basic $2.01). Common-stockholder earnings included the effect of the Series A preferred conversion gain.
- First-half operating cash flow was $1.8, compared with a $140.8 outflow in 2017. Investing cash flow was $264.3, substantially reflecting sale proceeds; financing cash flow was a $393.1 outflow. Capital expenditures were $101.5.
- Cash and cash equivalents were $402.4 at June 30; restricted cash was an additional $182.9. Combined cash and restricted cash was $585.3, down from $693.7 at year-end 2017. Some cash is restricted or held in foreign subsidiaries and VIEs.
- Total long-term debt, including its current portion and capital lease/sale-leaseback obligations, was $3,010.5, down from $3,468.9 at December 31, 2017. Current debt was $157.9. The company repaid $350.0 of its 2024 term loan and reduced its interest-rate margin by 100 basis points. It was not subject to the revolving-credit leverage covenant at quarter-end.
- Current assets were $1,271.7 and current liabilities $1,251.9. Restricted cash and held-for-sale balances affect the interpretation of near-term liquidity.
Material changes versus comparable periods
- Q2 revenue declined 2%, with $50.5 of lower revenue from dispositions and $10.3 from foreign exchange, partly offset by organic enrollment and pricing/mix. First-half revenue was essentially flat: dispositions reduced revenue by $79.7, offset by organic enrollment, pricing/mix, and currency effects.
- Andean & Iberian was the main growth contributor: Q2 revenue rose 12% and Adjusted EBITDA 14%; first-half revenue rose 14% and Adjusted EBITDA 22%. Brazil and EMEAA revenue and Adjusted EBITDA declined in Q2; Online & Partnerships revenue fell 6% and Adjusted EBITDA fell 7%. Mexico’s first-half revenue increased 2%, while Adjusted EBITDA fell 19%.
- Operating income improved in both periods, aided by lower corporate costs and, year to date, lower share-based compensation and EiP expenses. Lower interest expense also supported results.
- Reported first-half net income was significantly affected by approximately $310.0 of net gains on subsidiary sales and a $92.3 derivative gain. Q2 included a $111.6 derivative gain, primarily related to embedded derivatives associated with the Series A preferred stock. These items make reported earnings less representative of underlying operations.
- All Series A preferred shares converted into approximately 36.1 million Class A shares on April 23, 2018. The conversion also resulted in a $74.1 gain included in income available to common stockholders for EPS purposes.
Outlook, risks, contingencies, and unusual items
- Management expects operating cash flow and available cash to meet current operating requirements for at least the next 12 months. The company plans further divestitures in Europe, Asia, and Central America, expects proceeds above $1 billion, and anticipates an approximately $700 annual revenue reduction. Timing and completion remain uncertain and subject to market conditions, approvals, and third-party consents.
- The sale of St. Augustine was pending at quarter-end, with a stated transaction value of $400.0, subject to adjustments and approvals; management expected closing in late 2018. Kendall’s sale closed August 6, 2018 for nominal consideration, with post-closing payments and an expected approximately $24.0 lease-related charge in Q3. Malaysia’s Ministry of Education denied approval of the proposed INTI sale in July 2018; options were under evaluation.
- Chile’s higher-education law retains restrictions on conflicts of interest and related-party transactions; implementing rules and their effects remained uncertain. Turkish regulatory changes and audit decisions could also affect Bilgi and related-party arrangements. Management could not predict the effects of either country’s developments.
- Potential exposures include Chilean student-loan guarantees, with a maximum potential payment amount of approximately $506.0 and a recorded estimated liability of $36.1; tax matters, including Spanish audits; and legal contingencies. The company estimated up to $48.0 of reasonably possible unrecorded losses for certain Brazil contingencies. It reported no belief that ordinary-course legal proceedings would materially affect its financial statements.
- Disclosure controls and procedures were deemed ineffective because four previously disclosed material weaknesses had not been remediated as of June 30, 2018. Management nevertheless stated that the statements fairly present the company’s results and financial position.
- Seasonality affects quarterly comparisons: management says Q2 and Q4 are generally stronger revenue quarters. Foreign currency movements, student enrollment and retention, regulatory developments, divestiture execution, and the ability to remediate control weaknesses are important risks.
Most important facts for investors to verify
- Underlying earnings and cash generation after excluding divestiture, derivative, preferred-conversion, and other unusual items; reconcile GAAP results with Adjusted EBITDA.
- Progress and realized proceeds from planned divestitures, including St. Augustine, Kendall, and INTI, and the resulting changes in revenue, debt, and operating profile.
- Enrollment and margin trends in Brazil, Mexico, and Online & Partnerships, and whether Andean & Iberian growth is sustainable.
- Available liquidity after considering restricted cash, VIE cash restrictions, debt service, and working-capital needs.
- Remediation of the four material weaknesses and developments in Chilean, Turkish, U.S. education, and tax-related matters.