LAUREATE EDUCATION, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q (this Form 10-Q) contains "forward-looking statements" within the meaning of the federal securities laws, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or similar expressions that concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, costs, expenditures, cash flows, growth rates and financial results, and all statements we make relating to (i) our current growth strategy and other future plans, strategies or transactions that may be identified, explored or implemented and any litigation or dispute resulting from any completed transaction, (ii) any anticipated share repurchases or cash distributions, and (iii) the potential impact of the COVID-19 pandemic on our business or the global economy as a whole are forwardlooking statements. In addition, we, through our senior management, from time to time make forwardlooking public statements concerning our expected future operations and performance and other developments. All of these forwardlooking statements are subject to risks and uncertainties that may change at any time, including with respect to our current growth strategy and the impact of any completed divestiture or separation transaction on our remaining businesses. Accordingly, our actual results may differ materially from those we expected. We derive most of our forwardlooking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, including, without limitation, in conjunction with the forward-looking statements and risk factor included in this Form 10-Q, are disclosed in "Item 1-Business," and "Item 1A-Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (the 2021 Form 10-K). Some of the factors that we believe could affect our results include: •the risks associated with operating our portfolio of degree-granting higher education institutions inMexico andPeru , including complex business, foreign currency, political, legal, regulatory, tax and economic risks;
•our ability to maintain and, subsequently, increase tuition rates and student enrollments in our institutions;
•the risks and uncertainties related to the long-term effect to the Company of the COVID-19 pandemic and any resurgence, including, but not limited to, its effect on student enrollment, tuition pricing, and collections in future periods;
•our ability to effectively manage the growth of our business and increase our operating leverage;
•the effect of existing international andU.S. laws and regulations governing our business or changes to those laws and regulations or in their application to our business;
•changes in the political, economic and business climate in the markets in which we operate;
•risks of downturns in general economic conditions and in the educational services and education technology industries that could, among other things, impair our goodwill and intangible assets;
•possible increased competition from other educational service providers;
•market acceptance of new service offerings by us or our competitors and our ability to predict and respond to changes in the markets for our educational services;
•the effect on our business and results of operations from fluctuations in the value of foreign currencies;
•our ability to attract and retain key personnel;
•the fluctuations in revenues due to seasonality;
•our ability to maintain proper and effective internal controls necessary to produce accurate financial statements on a timely basis;
•our focus on a specific public benefit purpose and producing a positive effect for society may negatively influence our financial performance; and
•the future trading prices of our common stock and the impact of any securities analysts' reports on these prices.
We caution you that the foregoing list of important factors may not contain all
of the material factors that are important to you. In addition, in light of
these risks and uncertainties, the matters referred to in the forward-looking
statements contained in this Form 10-Q may not in fact occur. We undertake no
obligation to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise, except as otherwise
required by law.
24
--------------------------------------------------------------------------------Introduction
This Management's Discussion and Analysis of Financial Condition and Results of Operations (the MD&A) is provided to assist readers of the financial statements in understanding the results of operations, financial condition and cash flows ofLaureate Education, Inc. This MD&A should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-Q. The consolidated financial statements included elsewhere in this Form 10-Q are presented inU.S. dollars (USD) rounded to the nearest thousand, with the amounts in MD&A rounded to the nearest tenth of a million. Therefore, discrepancies in the tables between totals and the sums of the amounts listed may occur due to such rounding. Our MD&A is presented in the following sections: •Overview; •Results of Operations;
•Liquidity and Capital Resources;
•Critical Accounting Policies and Estimates; and
•Recently Adopted Accounting Standards.
Overview Our Business We operate a portfolio of degree-granting higher education institutions inMexico andPeru . Collectively, we have approximately 388,700 students enrolled at five institutions in these two countries. We believe that the higher education markets inMexico andPeru present an attractive long-term opportunity, primarily because of the large and growing imbalance between the supply and demand for affordable, quality higher education in those markets. We believe that the combination of the projected growth in the middle class, limited government resources dedicated to higher education, and a clear value proposition demonstrated by the higher earnings potential afforded by higher education, creates substantial opportunities for high-quality private institutions to meet this growing and unmet demand. By offering high-quality, outcome-focused education, we believe that we enable students to prosper and thrive in the dynamic and evolving knowledge economy. We have two reportable segments as described below. We group our institutions by geography inMexico andPeru for reporting purposes.
COVID-19
In response to the COVID-19 pandemic, we transitioned the educational delivery method at all of our institutions to be online, leveraging our existing technologies and learning platforms to serve students outside of the traditional classroom setting. Face-to-face educational activities have now resumed across our campuses. We will continue to monitor the situation and adjust based on what is most appropriate for each market. See also "Item 1A-Risk Factors-An epidemic, pandemic or other public health emergency, such as the current global coronavirus (COVID-19) outbreak and the efficacy and distribution of COVID-19 vaccines in the locations in which we operate could have a material adverse effect on our business, financial condition, cash flows and results of operations" in our 2021 Form 10-K.
Discontinued Operations
As a result of the strategic review first announced inJanuary 2020 , during the third quarter of 2020, the Company completed a sale of its operations inChile and signed agreements to sell its operations inBrazil ,Australia and New Zealand , as well asWalden University inthe United States . Additionally, prior to 2020, the Company had announced the divestiture of certain other subsidiaries inEurope ,Asia andCentral America , which has been completed. These announcements represented strategic shifts that had a major effect on the Company's operations and financial results. Accordingly, all of the divestitures that were part of these strategic shifts were accounted for as Discontinued Operations for all periods presented in accordance with Accounting Standards Codification (ASC) 205-20, "Discontinued Operations" (ASC 205). All planned divestitures have now been completed, and the Company has concluded its strategic review process. The Company's continuing operations areMexico andPeru . All other markets have been divested (the Discontinued Operations). The Discontinued Operations are excluded from the segment information for all periods presented, as they do not meet the criteria for a reportable segment under ASC 280, "Segment Reporting." Unless indicated otherwise, the information in the MD&A relates to continuing operations. See also Note 3, Discontinued Operations and Assets Held for Sale, in our consolidated financial statements included elsewhere in this Form 10-Q. 25 --------------------------------------------------------------------------------
Our Segments
Our segments generate revenues by providing an education that emphasizes profession-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines. Our educational offerings utilize hybrid (a combination of online and in-classroom) courses and programs to deliver their curriculum. TheMexico andPeru markets are characterized by what we believe is a significant imbalance between supply and demand. The demand for higher education is large and growing and is fueled by several demographic and economic factors, including a growing middle class, global growth in services and technology-related industries and recognition of the significant personal and economic benefits gained by graduates of higher education institutions. The target demographics are primarily 18- to 24-year-olds in the countries in which we compete. We compete with other private higher education institutions on the basis of price, educational quality, reputation and location. We believe that we compare favorably with competitors because of our focus on quality, professional-oriented curriculum and the competitive advantages provided by our network. There are a number of private and public institutions inMexico andPeru , and it is difficult to predict how the markets will evolve and how many competitors there will be in the future. We expect competition to increase as the Mexican and Peruvian markets mature. Essentially all of our revenues were generated from private pay sources as there are no material government-sponsored loan programs inMexico orPeru . Specifics related to both of our reportable segments are discussed below: •Private education providers inMexico constitute 35% of the total higher-education market. The private sector plays a meaningful role in higher education, bridging supply and demand imbalances created by a lack of capacity at public universities. Laureate owns two nationally licensed institutions and is present throughout the country with a footprint of over 35 campuses. Students in our Mexican institutions typically finance their own education. •In Peru, private universities are increasingly providing the capacity to meet growing demand and constitute approximately 69% of the total higher-education market. Laureate owns three institutions inPeru . Corporate is a non-operating business unit whose purpose is to support operations. Its departments are responsible for establishing operational policies and internal control standards, implementing strategic initiatives, and monitoring compliance with policies and controls throughout our operations. Our Corporate segment is an internal source of capital and provides financial, human resource, information technology, insurance, legal, and tax compliance services. The Corporate segment also contains the eliminations of inter-segment revenues and expenses. The following information for our reportable segments is presented as ofJune 30, 2022 : 2022 YTD Revenues % Contribution to 2022 YTD Institutions Enrollment ($ in millions)(1) Revenues Mexico 2 182,800 $ 287.2 49 % Peru 3 205,900 304.6 51 % Total (1) 5 388,700 $ 594.9 100 %
(1) Amounts related to Corporate totaled
Challenges Our operations are outside ofthe United States and are subject to complex business, economic, legal, regulatory, political, tax and foreign currency risks, which may be difficult to adequately address. As a result, we face risks that are inherent in international operations, including: fluctuations in exchange rates, possible currency devaluations, inflation and hyper-inflation; price controls and foreign currency exchange restrictions; potential economic and political instability in the countries in which we operate; expropriation of assets by local governments; key political elections and changes in government policies; multiple and possibly overlapping and conflicting tax laws; and compliance with a wide variety of foreign laws. See "Item 1A-Risk Factors-Risks Relating to Our Business-We operate a portfolio of degree-granting higher education institutions inMexico andPeru and are subject to complex business, economic, legal, political, tax and foreign currency risks, which risks may be difficult to adequately address," in our 2021 Form 10-K. We plan to grow our operations organically by: 1) adding new programs and course offerings, including online and hybrid offerings; 2) expanding target student demographics; and 3) increasing capacity at existing and new campus locations. Our success in growing our business will depend on the ability to anticipate and effectively manage these and other risks related to operating in various countries. 26 --------------------------------------------------------------------------------
Regulatory Environment and Other Matters
Our business is subject to varying laws and regulations based on the requirements of local jurisdictions. These laws and regulations are subject to updates and changes. We cannot predict the form of the rules that ultimately may be adopted in the future or what effects they might have on our business, financial condition, results of operations and cash flows. We will continue to develop and implement necessary changes that enable us to comply with such laws and regulations. See also "Item 1A-Risk Factors-Risks Relating to Our Business-Our institutions are subject to uncertain and varying laws and regulations, and any changes to these laws or regulations or their application to us may materially adversely affect our business, financial condition and results of operations," and "Item 1-Business-Industry Regulation" in our 2021 Form 10-K for a detailed discussion of our different regulatory environments. Key Business Metric Enrollment Enrollment is our lead revenue indicator and represents our most important non-financial metric. We define "enrollment" as the number of students registered in a course on the last day of the enrollment reporting period. New enrollments provide an indication of future revenue trends. Total enrollment is a function of continuing student enrollments, new student enrollments and enrollments from acquisitions, offset by graduations, attrition and enrollment decreases due to dispositions. Attrition is defined as a student leaving the institution before completion of the program. To minimize attrition, we have implemented programs that involve assisting students in remedial education, mentoring, counseling and student financing. Each of our institutions has an enrollment cycle that varies by geographic region and academic program. Each institution has a "Primary Intake" period during each academic year in which the majority of the enrollment occurs. Most institutions also have one or more smaller "Secondary Intake" periods. Our Peruvian institutions have their Primary Intake during the first calendar quarter and a Secondary Intake during the third calendar quarter. Institutions in ourMexico segment have their Primary Intake during the third calendar quarter and a Secondary Intake during the first calendar quarter. Our institutions inPeru are generally out of session in January, February and July, while institutions inMexico are generally out of session in May through July. Revenues are recognized when classes are in session.
Principal Components of Income Statement
Revenues
The majority of our revenue is derived from tuition and educational services. The amount of tuition generated in a given period depends on the price per credit hour and the total credit hours or price per program taken by the enrolled student population. The price per credit hour varies by program, by market and by degree level. Additionally, varying levels of discounts and scholarships are offered depending on market-specific dynamics and individual achievements of our students. Revenues are recognized net of scholarships and other discounts, refunds and waivers. In addition to tuition revenues, we generate other revenues from student fees and other education-related activities. These other revenues are less material to our overall financial results and have a tendency to trend with tuition revenues. The main drivers of changes in revenues between periods are student enrollment and price. We continually monitor market conditions and carefully adjust our tuition rates to meet local demand levels. We proactively seek the best price and content combinations to remain competitive in all the markets in which we operate.
Direct Costs
Our direct costs include labor and operating costs associated with the delivery of services to our students, including the cost of wages, payroll taxes and benefits, depreciation and amortization, rent, utilities, bad debt expenses, and marketing and promotional costs to grow future enrollments. In general, a significant portion of our direct costs tend to be variable in nature and trend with enrollment, and management continues to monitor and improve the efficiency of instructional delivery.
General and Administrative Expenses
Our general and administrative expenses primarily consist of costs associated with corporate departments, including executive management, finance, legal, business development and other departments that do not provide direct operational services.
27
--------------------------------------------------------------------------------Factors Affecting Comparability
Foreign Exchange
While the USD is our reporting currency, our institutions are located inMexico andPeru and operate in other functional currencies, namely the Mexican peso and Peruvian nuevo sol. We monitor the impact of foreign currency movements and the correlation between the local currency and the USD. Our revenues and expenses are generally denominated in local currency. The principal foreign exchange exposure is the risk related to the translation of revenues and expenses incurred in each country from the local currency into USD. See "Item 1A-Risk Factors-Risks Relating to Our Business-Our reported revenues and earnings may be negatively affected by the strengthening of theU.S. dollar and currency exchange rates" in our 2021 Form 10-K. In order to provide a framework for assessing how our business performed excluding the effects of foreign currency fluctuations, we present organic constant currency in our segment results, which is calculated using the change from prior-year average foreign exchange rates to current-year average foreign exchange rates, as applied to local-currency operating results for the current year, and then excludes the impact of other items, as described in the segments results.
Seasonality
Our institutions have a summer break during which classes are generally not in
session and minimal revenues are recognized. In addition to the timing of summer
breaks, holidays such as Easter also have an impact on our academic calendar.
Operating expenses, however, do not fully correlate to the enrollment and
revenue cycles, as the institutions continue to incur expenses during summer
breaks. Given the geographic diversity of our institutions and differences in
timing of summer breaks, our second and fourth quarters are stronger revenue
quarters as the majority of our institutions are in session for most of these
respective quarters. Our first and third fiscal quarters are weaker revenue
quarters because our institutions have summer breaks for some portion of one of
these two quarters. However, our primary enrollment intakes occur during the
first and third quarters. Due to this seasonality, revenues and profits in any
one quarter are not necessarily indicative of results in subsequent quarters and
may not be correlated to new enrollment in any one quarter. Additionally,
seasonality may be affected due to other events that could change the academic
calendar at our institutions. See "Item 1A-Risk Factors-Risks Relating to Our
Business-We experience seasonal fluctuations in our results of operations" in
our 2021 Form 10-K.
Income Tax Expense
Our consolidated income tax provision is derived based on the combined impact of
federal, state and foreign income taxes. Also, discrete items can arise in the
course of our operations that can further impact the Company's effective tax
rate for the period. Our tax rate fluctuates from period to period due to
changes in the mix of earnings between our tax-paying entities and our
loss-making entities for which it is not 'more likely than not' that a tax
benefit will be realized on the loss. See "Item 1A-Risk Factors-Risks Relating
to Our Business-We may have exposure to greater-than-anticipated tax
liabilities" in our 2021 Form 10-K.
28
--------------------------------------------------------------------------------Results from the Discontinued Operations
The results of operations of our Discontinued Operations for the three and six
months ended
For the three months ended For the six months ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Revenues $ - $ 232.1 $ - $ 471.9
Share-based compensation expense - (0.6) - (0.8)
Other direct costs - (171.5) - (372.7)
Loss on impairment of assets - (0.2) - (1.3)
Other non-operating expense - (4.4) - (15.6)
Gain on sale of discontinued operations before
taxes, net 4.1 30.1 4.9 13.3
Pretax income of discontinued operations 4.1 85.6 4.9 94.8
Income tax benefit (expense) - 1.1 - (8.6)
Income from discontinued operations, net of
tax $ 4.1 $ 86.7 $ 4.9 $ 86.2 We completed all of our planned divestitures in 2021. Our remaining operations are included in continuing operations.
Six Months Ended
During the second quarter of 2022, we completed the transfer of the remaining assets and liabilities that were classified as held for sale as ofDecember 31, 2021 , which related to the divestiture of our operations inChile . This resulted in a gain of approximately$4.3 million .
Six Months Ended
On
OnJanuary 25, 2018 , we completed the sale ofLEI Lie Ying Limited inChina . At the closing of the sale, a portion of the total transaction value was paid into an escrow account, to be distributed to the Company pursuant to the terms and conditions of the escrow agreement. During the first quarter of 2021, the Company adjusted the final receivable balance from the escrow account of168.3 million Hong Kong Dollars (approximately$21.7 million at the date of receipt inApril 2021 ), which resulted in a pre-tax gain of approximately$13.6 million . During the first quarter of 2021, we recorded a loss of approximately$32.4 million in order to adjust the carrying value of ourBrazil disposal group to its estimated fair value less costs to sell as ofMarch 31, 2021 . This loss is included in Gain on sale of discontinued operations before taxes, net.
On
Results of Operations
The following discussion of the results of our operations is organized as follows:
•Summary Comparison of Consolidated Results;
•Non-GAAP Financial Measure; and
•Segment Results.
29
--------------------------------------------------------------------------------Summary Comparison of Consolidated Results
Discussion of Significant Items Affecting the Consolidated Results for the Six
Months Ended
InMarch 2021 , the Company decided that, during 2021, it would wind down certain support functions related to the Laureate network and would no longer invest in and support the Laureate tradename beyond 2021. As a result, the Company tested the asset for impairment and estimated the fair value of the tradename asset using the relief-from-royalty method, based on the projected revenues for each business over the estimated remaining useful life of the asset. As a result of the impairment test, the Company concluded that the estimated fair value of the Laureate tradename was less than its carrying value by approximately$51.4 million and recorded an impairment charge for that amount. During the second quarter of 2021, we fully repaid the remaining balance outstanding under our Senior Notes due 2025 using a portion of the proceeds received from the sales of our operations inAustralia and New Zealand andBrazil . In connection with the debt repayment, the Company recorded a loss on debt extinguishment of$77.9 million , related to the redemption premium paid and the write off of the unamortized deferred financing costs associated with the repaid debt balances. This loss is included in other non-operating expense in the tables below. InNovember 2020 , in connection with the signing of the sale agreement for ourBrazil operations, the Company entered intosix BRL -to-USD swap agreements to mitigate the risk of foreign currency exposure on the expected proceeds from the sale. The sale of ourBrazil operations closed onMay 28, 2021 . OnJune 2, 2021 , the Company settled the swap agreements, which resulted in a realized loss on derivatives of$24.5 million . This loss is included in other non-operating expense in the tables below. Comparison of Consolidated Results for the Three Months EndedJune 30, 2022 and 2021 % Change Better/(Worse) (in millions) 2022 2021 2022 vs. 2021 Revenues$ 385.4 $ 327.6 18 % Direct costs 242.8 213.3 (14) % General and administrative expenses 15.9 49.4 68 % Loss on impairment of assets - 7.2 100 % Operating income 126.6 57.7 119 % Interest expense, net of interest income (2.5) (13.0) 81 % Other non-operating expense (12.8) (147.3) 91 % Income (loss) from continuing operations before income taxes 111.4 (102.7) nm Income tax expense (72.0) (13.2) nm Income (loss) from continuing operations 39.4 (115.9) 134 % Income from discontinued operations, net of tax 4.1 86.7 (95) % Net income (loss) 43.6 (29.2) nm Net (income) loss attributable to noncontrolling interests (0.1) 0.2 150 % Net income (loss) attributable to Laureate Education, Inc.$ 43.4 $ (29.0) nm
nm - percentage changes not meaningful
For further details on certain discrete items discussed below, see "Discussion of Significant Items Affecting the Consolidated Results."
30
--------------------------------------------------------------------------------
Comparison of Consolidated Results for the Three Months Ended
Revenues increased by$57.8 million to$385.4 million for the three months endedJune 30, 2022 (the 2022 fiscal quarter) from$327.6 million for the three months endedJune 30, 2021 (the 2021 fiscal quarter). This increase in revenues was largely attributable to higher average total organic enrollment at our institutions during the 2022 fiscal quarter, increasing revenues by$38.0 million compared to the 2021 fiscal quarter. The effect of changes in tuition rates and enrollments in programs at varying price points (product mix), pricing and timing increased revenues by$16.4 million compared to the 2021 fiscal quarter. Additionally, the effect of a net change in foreign currency exchange rates increased revenues by$3.4 million compared to the 2021 fiscal quarter. Direct costs and general and administrative expenses combined decreased by$4.0 million to$258.7 million for the 2022 fiscal quarter from$262.7 million for the 2021 fiscal quarter. Expenses related to the Excellence-in-Process (EiP) program were$12.3 million lower in the 2022 fiscal quarter as compared to the 2021 fiscal quarter, following the completion of the EiP program in the fourth quarter of 2021. Depreciation and amortization expense was lower by$12.3 million , which was mostly attributable to the finite-lived tradename being fully amortized during 2021. In addition, Corporate and Eliminations expenses accounted for a decrease in costs of$12.0 million , driven by cost-saving initiatives. These decreases in direct costs were partially offset by the effect of operational changes, which increased costs by$31.0 million , primarily due to the effect of higher enrollment at our institutions. The effect of a net change in foreign currency exchange rates also increased costs by$1.6 million compared to the 2021 fiscal quarter. Operating income increased by$68.9 million to$126.6 million for the 2022 fiscal quarter from$57.7 million for the 2021 fiscal quarter. Operating income increased at both ourPeru andMexico segments, as compared to the 2021 fiscal quarter.
Interest expense, net of interest income decreased by
Other non-operating expense decreased by$134.5 million to$12.8 million for the 2022 fiscal quarter from$147.3 million for the 2021 fiscal quarter. This decrease was attributable to: (1) the year-over-year effect of a loss on debt extinguishment of$77.9 million during the 2021 fiscal quarter in connection with the repayment of the Senior Notes due 2025; (2) the year-over-year effect of a loss on derivative instruments of$53.8 million during the 2021 fiscal quarter, related to the settlement of foreign currency swap agreements in connection with the sale of our Brazilian operations; (3) higher gain on disposal of subsidiaries of$1.5 million during the 2022 fiscal quarter; (4) a lower loss on foreign currency exchange of$1.0 million during the 2022 fiscal quarter; and (5) an increase in other non-operating income of$0.3 million during the 2022 fiscal quarter.
Income tax expense increased by
Income from discontinued operations, net of tax decreased by$82.6 million to$4.1 million for the 2022 fiscal quarter from$86.7 million for the 2021 fiscal quarter. See Overview for further detail on results of the Discontinued Operations. 31 -------------------------------------------------------------------------------- Comparison of Consolidated Results for the Six Months EndedJune 30, 2022 and 2021 % Change Better/(Worse) (in millions) 2022 2021 2022 vs. 2021 Revenues$ 594.9 $ 522.3 14 % Direct costs 425.7 395.2 (8) % General and administrative expenses 33.4 92.0 64 % Loss on impairment of assets 0.1 63.9 100 % Operating income (loss) 135.7 (28.7) nm Interest expense, net of interest income (4.2) (35.9) 88 % Other non-operating expense (17.6) (89.8) 80 % Income (loss) from continuing operations before income taxes and equity in net income of affiliates 113.9 (154.4) 174 % Income tax expense (119.9) (126.0) 5 % Equity in net income of affiliates, net of tax 0.1 - nm Loss from continuing operations (6.0) (280.4) 98 % Income from discontinued operations, net of tax 4.9 86.2 (94) % Net loss (1.1) (194.2) 99 % Net loss attributable to noncontrolling interests 0.3 0.2 (50) %
Net loss attributable to
(193.9) 100 %
nm - percentage changes not meaningful
For further details on certain discrete items discussed below, see "Discussion of Significant Items Affecting the Consolidated Results."
Comparison of Consolidated Results for the Six Months Ended
Revenues increased by$72.6 million to$594.9 million for the six months endedJune 30, 2022 (the 2022 fiscal period) from$522.3 million for the six months endedJune 30, 2021 (the 2021 fiscal period). Average total organic enrollment was higher at our institutions, increasing revenues by$63.0 million compared to the 2021 fiscal period. The effect of product mix, pricing and timing increased revenues by$9.3 million for the 2022 fiscal period. In addition, the effect of a net change in foreign currency exchange rates increased revenues by$0.5 million compared to the 2021 fiscal period. Other Corporate and Eliminations changes accounted for a decrease in revenues of$0.2 million . Direct costs and general and administrative expenses combined decreased by$28.1 million to$459.1 million for the 2022 fiscal period from$487.2 million for the 2021 fiscal period. This decrease in direct costs was primarily related to: (1) lower EiP implementation expense of$26.7 million in the 2022 fiscal period following the completion of our EiP program in 2021; (2) lower depreciation and amortization expense of$20.2 million mainly driven by the full amortization of the finite-lived tradename in 2021; (3) Other Corporate and Eliminations expenses, which accounted for a decrease in costs of$17.8 million in the 2022 fiscal period, related to cost-reduction efforts; (4) a period-over-period decrease in direct costs of$13.3 million from changes in acquisition-related contingent liabilities for taxes other-than-income tax, net of changes in indemnification assets; and (5) the effect of a net change in foreign currency exchange rates, which decreased costs by$2.4 million . These decreases in direct costs were partially offset by the effect of operational changes, which increased direct costs by$52.3 million , mostly attributable to ourPeru segment. Operating income (loss) changed by$164.4 million to an income of$135.7 million for the 2022 fiscal period from a loss of$(28.7) million for the 2021 fiscal period. This change was primarily a result of the impairment loss related to the Laureate tradename impairment that was recognized during the 2021 fiscal period, combined with higher operating income at ourMexico andPeru segments during the 2022 fiscal period.
Interest expense, net of interest income decreased by
32
--------------------------------------------------------------------------------
Other non-operating expense decreased by $72.2 million to $17.6 million for the
2022 fiscal period from $89.8 million for the 2021 fiscal period. This change
was attributable to: (1) the year-over-year effect of a loss on debt
extinguishment of $77.9 million during the 2021 fiscal quarter in connection
with the repayment of the Senior Notes due 2025; (2) a loss on derivative
instruments of $24.5 million during the 2021 fiscal period, driven by settlement
of foreign currency swap agreements in connection with the sale of our Brazilian
operations; and (3) higher gain on disposal of subsidiaries of $1.5 million
during the 2022 fiscal period. These decreases in other non-operating expense
were partially offset by a loss on foreign currency exchange in the 2022 fiscal
period, compared to a gain in the 2021 fiscal period, for a change of $30.8
million and the period-over-period effect of other non-operating expense of $0.9
million during the 2022 fiscal period.
Income tax expense decreased by $6.1 million to $119.9 million for the 2022
fiscal period from $126.0 million for the 2021 fiscal period. This decrease was
primarily attributable to discrete tax expense recorded during the 2021 fiscal
period of approximately $58.9 million for increases to income tax reserves,
partially offset by discrete tax expense recorded during the 2022 fiscal period
of approximately $32.5 million for additions to income tax reserves. The
remaining difference was primarily attributable to the change in pretax
earnings.
Income from discontinued operations, net of tax decreased by $81.3 million to
$4.9 million for the 2022 fiscal period from $86.2 million for the 2021 fiscal
period. See Overview for further detail on results of the Discontinued
Operations.
Non-GAAP Financial Measure
We define Adjusted EBITDA as income (loss) from continuing operations, before
equity in net (income) loss of affiliates, net of tax, income tax expense
(benefit), foreign currency exchange (gain) loss, net, other (income) expense,
net, loss (gain) on derivatives, loss on debt extinguishment, interest expense
and interest income, plus depreciation and amortization, share-based
compensation expense, loss on impairment of assets and expenses related to our
Excellence-in-Process (EiP) initiative. Adjusted EBITDA is used in addition to
and in conjunction with results presented in accordance with GAAP and should not
be relied upon to the exclusion of GAAP financial measures.
Adjusted EBITDA is a key measure used by our management and Board of Directors
to understand and evaluate our core operating performance and trends, to prepare
and approve our annual budget and to develop short- and long-term operational
plans. In particular, the exclusion of certain expenses in calculating Adjusted
EBITDA can provide a useful measure for period-to-period comparisons of our core
business. Additionally, Adjusted EBITDA is a key financial measure used by the
compensation committee of our Board of Directors and our Chief Executive Officer
in connection with the payment of incentive compensation to our executive
officers and other members of our management team. Accordingly, we believe that
Adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our
management and Board of Directors.
33
--------------------------------------------------------------------------------
The following table presents Adjusted EBITDA and reconciles income (loss) from
continuing operations to Adjusted EBITDA for the three months ended June 30,
2022 and 2021:
% Change
Better/(Worse)
(in millions) 2022 2021 2022 vs. 2021
Income (loss) from continuing operations $ 39.4 $ (115.9) 134 %
Plus:
Income tax expense 72.0 13.2 nm
Income (loss) from continuing operations before
income taxes 111.4 (102.7) nm
Plus:
Gain on disposal of subsidiaries, net (1.5) - nm Foreign currency exchange loss, net 14.5 15.5 6 % Other (income) loss, net (0.2) 0.1 nm Loss on derivatives - 53.8 100 % Loss on debt extinguishment - 77.9 100 % Interest expense 4.2 13.5 69 % Interest income (1.7) (0.5) nm Operating income 126.6 57.7 119 % Plus: Depreciation and amortization 14.8 27.0 45 % EBITDA 141.4 84.7 67 % Plus: Share-based compensation expense (a) 2.4 2.6 8 % Loss on impairment of assets (b) - 7.2 100 % EiP implementation expenses (c) 0.3 12.6 98 % Adjusted EBITDA$ 144.1 $ 107.1 35 %
nm - percentage changes not meaningful
(a) Represents non-cash, share-based compensation expense pursuant to the provisions of ASC 718, "Stock Compensation." (b) Represents non-cash charges related to impairments of long-lived assets. (c) EiP implementation expenses are related to our enterprise-wide initiative to optimize and standardize Laureate's processes, creating vertical integration of procurement, information technology, finance, accounting and human resources. It included the establishment of regional shared services organizations (SSOs), as well as improvements to the Company's system of internal controls over financial reporting. The EiP initiative also included other back- and mid-office areas, as well as certain student-facing activities, expenses associated with streamlining the organizational structure, an enterprise-wide program aimed at revenue growth, and certain non-recurring costs incurred in connection with the dispositions. The EiP initiative was completed as ofDecember 31, 2021 , except for certain EiP expenses related to the run out of programs that began in prior periods.
Comparison of Depreciation and Amortization, Share-based Compensation and EiP
Implementation Expenses for the Three Months Ended
Depreciation and amortization decreased by$12.2 million to$14.8 million for the 2022 fiscal quarter from$27.0 million for the 2021 fiscal quarter. This decrease was primarily attributable to the finite-lived Laureate's tradename, which was fully amortized in 2021. When combined with other items, this change decreased depreciation and amortization by$12.3 million . The effects of foreign currency exchange increased depreciation and amortization expense by$0.1 million for the 2022 fiscal quarter.
Share-based compensation expense decreased by
34
--------------------------------------------------------------------------------
EiP implementation expenses decreased by $12.3 million to $0.3 million for the
2022 fiscal quarter from $12.6 million for the 2021 fiscal quarter. This
decrease resulted from the completion of our EiP program in 2021, with exception
of certain EiP expenses related to the run out of programs that began in prior
periods.
The following table presents Adjusted EBITDA and reconciles loss from continuing
operations to Adjusted EBITDA for the six months ended June 30, 2022 and 2021:
% Change
Better/(Worse)
(in millions) 2022 2021 2022 vs. 2021
Loss from continuing operations $ (6.0) $ (280.4) 98 %
Plus:
Equity in net income of affiliates, net of tax (0.1) - nm Income tax expense 119.9 126.0 5 % Income (loss) from continuing operations before income taxes and equity in net income of affiliates 113.9 (154.4) 174 %
Plus:
Gain on disposal of subsidiaries, net (1.5) - nm Foreign currency exchange loss (gain), net 18.1 (12.7) nm Other expense, net 1.0 - nm Loss on derivatives - 24.5 100 % Loss on debt extinguishment - 77.9 100 % Interest expense 7.9 37.1 79 % Interest income (3.7) (1.2) nm Operating income (loss) 135.7 (28.7) nm Plus: Depreciation and amortization 29.2 49.7 41 % EBITDA 164.9 21.0 nm
Plus:
Share-based compensation expense (a) 5.1 4.0 (28) % Loss on impairment of assets (b) 0.1 63.9 100 % EiP implementation expenses (c) 1.2 27.9 96 % Adjusted EBITDA$ 171.3 $ 116.8 47 %
nm - percentage changes not meaningful
(a) Represents non-cash, share-based compensation expense pursuant to the provisions of ASC 718, "Stock Compensation." (b) Represents non-cash charges related to impairments of long-lived assets. For further details, see "Discussion of Significant Items Affecting the Consolidated Results for the Six Months EndedJune 30, 2021 ." (c) EiP implementation expenses are related to our enterprise-wide initiative to optimize and standardize Laureate's processes, creating vertical integration of procurement, information technology, finance, accounting and human resources. It included the establishment of regional shared services organizations (SSOs), as well as improvements to the Company's system of internal controls over financial reporting. The EiP initiative also included other back- and mid-office areas, as well as certain student-facing activities, expenses associated with streamlining the organizational structure, an enterprise-wide program aimed at revenue growth, and certain non-recurring costs incurred in connection with the dispositions. The EiP initiative was completed as ofDecember 31, 2021 , except for certain EiP expenses related to the run out of programs that began in prior periods. 35 --------------------------------------------------------------------------------
Comparison of Depreciation and Amortization, Share-based Compensation and EiP
Implementation Expenses for the Six Months Ended
Depreciation and amortization decreased by$20.5 million to$29.2 million for the 2022 fiscal period from$49.7 million for the 2021 fiscal period. This decrease was primarily attributable to the finite-lived Laureate tradename, which was fully amortized in 2021. When combined with other items, this change decreased depreciation and amortization by$20.2 million . The effect of foreign currency exchange further decreased depreciation and amortization expense by$0.3 million for the 2022 fiscal period. Share-based compensation expense increased by$1.1 million to$5.1 million for the 2022 fiscal period from$4.0 million for the 2021 fiscal period. The increase was primarily related to the accelerated vesting of unvested equity awards for employees terminated in connection with the now-completed strategic review process. EiP implementation expenses decreased by$26.7 million to$1.2 million for the 2022 fiscal period from$27.9 million for the 2021 fiscal period. The decrease resulted from the completion of our EiP program in 2021, with the exception of certain EiP expenses related to the run out of programs that began in prior periods.
Segment Results
We have two reportable segments:Mexico andPeru , as discussed in Overview. For purposes of the following comparison of results discussion, "segment direct costs" represent direct costs incurred by the segment as they are included in Adjusted EBITDA, such that depreciation and amortization expense, loss on impairment of assets, share-based compensation expense and our EiP implementation expenses have been excluded. Organic enrollment is based on average total enrollment for the period. For a further description of our segments, see Overview.
The following table, derived from our consolidated financial statements included elsewhere in this Form 10-Q, presents selected financial information of our segments:
© Edgar Online, source
