Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
OR
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________.
Commission File Number: 001-38002
laureate.jpg
Laureate Education, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
52-1492296
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
650 S. Exeter Street, Baltimore, Maryland
 
21202
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (410) 843-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer x (Do not check if a smaller reporting company)
Smaller reporting company o Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding at June 30, 2017
Class A common stock, par value $0.004 per share
 
35,466,508 shares
Class B common stock, par value $0.004 per share
 
133,120,777 shares







INDEX
PART I. - FINANCIAL INFORMATION
 
Page No.
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
 
 
 
Consolidated Statements of Operations - Three months ended June 30, 2017 and June 30, 2016
 
 
 
 
 
 
Consolidated Statements of Operations - Six months ended June 30, 2017 and June 30, 2016
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income - Three months ended June 30, 2017 and June 30, 2016
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income - Six months ended June 30, 2017 and June 30, 2016
 
 
 
 
 
 
Consolidated Balance Sheets - June 30, 2017 and December 31, 2016
 
 
 
 
 
 
Consolidated Statements of Cash Flows - Six months ended June 30, 2017 and
June 30, 2016
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
PART II. - OTHER INFORMATION
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
SIGNATURES
 


1




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

IN THOUSANDS, except per share amounts
 
 
 
For the three months ended June 30,
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Revenues
$
1,277,439

 
$
1,231,910

Costs and expenses:
 
 
 
Direct costs
942,246

 
963,794

General and administrative expenses
91,343

 
57,548

Operating income
243,850

 
210,568

Interest income
4,460

 
4,062

Interest expense
(98,962
)
 
(105,833
)
Loss on debt extinguishment
(6,915
)
 
(1,681
)
Gain on derivatives
26,970

 
1,999

Other expense, net
(380
)
 
(1,276
)
Foreign currency exchange (loss) gain, net
(9,726
)
 
26,252

(Loss) gain on sales of subsidiaries, net
(172
)
 
243,261

Income from continuing operations before income taxes and equity in net income of affiliates
159,125

 
377,352

Income tax expense
(42,028
)
 
(28,393
)
Equity in net income of affiliates, net of tax
1

 
279

Net income
117,098

 
349,238

Net income attributable to noncontrolling interests
(712
)
 
(1,849
)
Net income attributable to Laureate Education, Inc.
$
116,386

 
$
347,389

 
 
 
 
Accretion of Series A convertible redeemable preferred stock and other redeemable noncontrolling interests and equity
(69,212
)
 
(438
)
Net income available to common stockholders
$
47,174

 
$
346,951


Basic and diluted earnings per share:
 
 
 
Basic earnings per share
$
0.28

 
$
2.60

Diluted earnings per share
$
0.28

 
$
2.59


The accompanying notes are an integral part of these consolidated financial statements.

2




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations

IN THOUSANDS, except per share amounts
 
 
 
For the six months ended June 30,
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Revenues
$
2,133,372

 
$
2,138,444

Costs and expenses:
 
 
 
Direct costs
1,795,478

 
1,833,617

General and administrative expenses
156,911

 
105,416

Operating income
180,983

 
199,411

Interest income
9,154


9,868

Interest expense
(201,595
)

(209,602
)
Loss on debt extinguishment
(8,430
)

(1,681
)
Gain (loss) on derivatives
39,117


(8,751
)
Other income (expense), net
56


(1,317
)
Foreign currency exchange (loss) gain, net
(7,436
)

53,934

(Loss) gain on sales of subsidiaries, net
(172
)
 
243,261

Income from continuing operations before income taxes and equity in net income of affiliates
11,677

 
285,123

Income tax expense
(14,934
)
 
(38,351
)
Equity in net income of affiliates, net of tax
1

 
20

Net (loss) income
(3,256
)
 
246,792

Net income attributable to noncontrolling interests
(3,166
)
 
(2,570
)
Net (loss) income attributable to Laureate Education, Inc.
$
(6,422
)
 
$
244,222

 
 
 
 
Accretion of Series A convertible redeemable preferred stock and other redeemable noncontrolling interests and equity
(108,081
)
 
1,077

Net (loss) income available to common stockholders
$
(114,503
)
 
$
245,299


Basic and diluted (loss) earnings per share:
 
 
 
Basic (loss) earnings per share
$
(0.71
)
 
$
1.84

Diluted (loss) earnings per share
$
(0.71
)
 
$
1.83


The accompanying notes are an integral part of these consolidated financial statements.


3




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

IN THOUSANDS
 
 
 
For the three months ended June 30,
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
117,098

 
$
349,238

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment, net of tax of $0 for both periods
28,455

 
(58,088
)
Unrealized gain on derivative instruments, net of tax of $0 for both periods
3,507

 
1,910

Minimum pension liability adjustment, net of tax of $0 and $1,900, respectively

 
8,885

Total other comprehensive income (loss)
31,962

 
(47,293
)
Comprehensive income
149,060

 
301,945

Net comprehensive income attributable to noncontrolling interests
(1,269
)
 
(1,508
)
Comprehensive income attributable to Laureate Education, Inc.
$
147,791

 
$
300,437


The accompanying notes are an integral part of these consolidated financial statements.

4




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

IN THOUSANDS
 
 
 
For the six months ended June 30,
2017
 
2016
 
(Unaudited)
 
(Unaudited)
Net (loss) income
$
(3,256
)
 
$
246,792

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment, net of tax of $0 for both periods
131,851

 
(29,113
)
Unrealized gain on derivative instruments, net of tax of $0 for both periods
6,099

 
3,123

Minimum pension liability adjustment, net of tax of $0 and $1,900, respectively

 
8,885

Total other comprehensive income (loss)
137,950

 
(17,105
)
Comprehensive income
134,694

 
229,687

Net comprehensive income attributable to noncontrolling interests
(4,055
)
 
(2,689
)
Comprehensive income attributable to Laureate Education, Inc.
$
130,639

 
$
226,998


The accompanying notes are an integral part of these consolidated financial statements.


5




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

IN THOUSANDS, except per share amounts
 
 
 
 
June 30, 2017
 
December 31, 2016
Assets
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents (includes VIE amounts of $114,684 and $169,074, see Note 2)
$
367,163

 
$
464,965

Restricted cash and investments
193,305

 
189,319

Receivables:
 
 
 
Accounts and notes receivable
669,039

 
494,646

Other receivables
21,524

 
23,758

Related party receivables
5,830

 
6,931

Allowance for doubtful accounts
(196,987
)
 
(190,499
)
Receivables, net
499,406

 
334,836

Income tax receivable
37,088

 
29,447

Prepaid expenses and other current assets
145,520

 
97,234

Total current assets (includes VIE amounts of $350,678 and $322,210, see Note 2)
1,242,482

 
1,115,801

Notes receivable, net
7,138

 
61,157

Property and equipment:
 
 
 
Land
418,754

 
396,821

Buildings
1,295,766

 
1,219,783

Furniture, equipment and software
1,251,255

 
1,160,350

Leasehold improvements
432,428

 
399,555

Construction in-progress
73,364

 
103,205

Accumulated depreciation and amortization
(1,263,167
)
 
(1,128,081
)
Property and equipment, net
2,208,400

 
2,151,633

Land use rights, net
45,741

 
45,275

Goodwill
2,020,620

 
1,934,464

Other intangible assets:
 
 
 
Tradenames
1,332,523

 
1,307,633

Other intangible assets, net
44,735

 
46,700

Deferred costs, net
61,529

 
57,748

Deferred income taxes
147,882

 
142,130

Derivative instruments
49,171

 
4,464

Other assets
209,515

 
195,465

Total assets (includes VIE amounts of $1,340,653 and $1,309,113, see Note 2)
$
7,369,736

 
$
7,062,470


The accompanying notes are an integral part of these consolidated financial statements.

6




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)

IN THOUSANDS, except per share amounts
 
 
 
 
June 30, 2017
 
December 31, 2016
Liabilities and stockholders' equity
(Unaudited)
 
 
Current liabilities:
 
 
 
Accounts payable
$
82,878

 
$
86,699

Accrued expenses
314,209

 
368,973

Accrued compensation and benefits
225,186

 
239,495

Deferred revenue and student deposits
380,164

 
362,891

Current portion of long-term debt
212,568

 
178,989

Current portion of due to shareholders of acquired companies
133,083

 
118,679

Income taxes payable
23,154

 
30,371

Derivative instruments

 
5,218

Other current liabilities
43,960

 
48,917

Total current liabilities (includes VIE amounts of $295,819 and $320,922, see Note 2)
1,415,202

 
1,440,232

Long-term debt, less current portion
3,291,713

 
3,629,375

Due to shareholders of acquired companies, less current portion
82,380

 
92,269

Deferred compensation
14,399

 
14,128

Income taxes payable
111,687

 
135,140

Deferred income taxes
459,283

 
452,084

Derivative instruments
7,941

 
7,750

Other long-term liabilities
281,972

 
270,267

Total liabilities (includes VIE amounts of $405,181 and $424,297, see Note 2)
5,664,577

 
6,041,245

Series A convertible redeemable preferred stock, par value $0.001 per share – 512 shares authorized, 400 and 343 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
232,030


332,957

Redeemable noncontrolling interests and equity
25,522

 
23,876

Stockholders' equity:
 
 
 
Preferred stock, par value $0.001 per share – 49,488 shares authorized, no shares issued and outstanding as of June 30, 2017 and December 31, 2016

 

Class A common stock, par value $0.004 per share – 700,000 shares authorized, 35,467 shares issued and outstanding as of June 30, 2017 and no shares authorized, issued and outstanding as of December 31, 2016
142

 

Class B common stock, par value $0.004 per share – 175,000 shares authorized, 133,120 shares issued and outstanding as of June 30, 2017 and no shares authorized, issued and outstanding as of December 31, 2016
533

 

Common stock, par value $0.004 per share – no shares authorized, issued and outstanding as of June 30, 2017 and 175,000 shares authorized, 133,376 shares issued and outstanding as of December 31, 2016

 
534

Additional paid-in capital
3,371,395

 
2,721,432

Accumulated deficit
(1,044,123
)
 
(1,037,701
)
Accumulated other comprehensive loss
(914,994
)
 
(1,052,055
)
Total Laureate Education, Inc. stockholders' equity
1,412,953

 
632,210

Noncontrolling interests
34,654

 
32,182

Total stockholders' equity
1,447,607

 
664,392

Total liabilities and stockholders' equity
$
7,369,736

 
$
7,062,470


The accompanying notes are an integral part of these consolidated financial statements.

7




LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
IN THOUSANDS
 
 
 
For the six months ended June 30,
2017
 
2016
Cash flows from operating activities
(Unaudited)
 
(Unaudited)
Net (loss) income
$
(3,256
)
 
$
246,792

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Depreciation and amortization
131,465

 
135,911

Loss (gain) on sale of subsidiary and disposal of property and equipment
1,927

 
(243,261
)
(Gain) loss on derivative instruments
(39,386
)
 
7,883

Loss on debt extinguishment
8,430

 
1,681

Payment of redemption and call premiums and fees on debt modification
(65,225
)
 

Non-cash interest expense
22,359

 
28,312

Non-cash share-based compensation expense
35,337

 
20,909

Bad debt expense
51,439

 
56,114

Deferred income taxes
(3,196
)
 
(12,535
)
Unrealized foreign currency exchange loss (gain)
11,756

 
(58,656
)
Non-cash loss from non-income tax contingencies
3,813

 
7,758

Other, net
(1,052
)
 
(1,090
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
318

 
(6,089
)
Receivables
(162,375
)
 
(148,198
)
Prepaid expenses and other assets
(99,019
)
 
(68,340
)
Accounts payable and accrued expenses
(86,368
)
 
6,766

Income tax receivable/payable, net
(21,868
)
 
7

Deferred revenue and other liabilities
9,231

 
(37,377
)
Net cash used in operating activities
(205,670
)
 
(63,413
)
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(86,793
)
 
(86,224
)
Expenditures for deferred costs
(8,248
)
 
(8,753
)
Receipts from sale of subsidiary and property and equipment
1,001

 
340,096

Property insurance recoveries
370

 
1,431

Settlement of derivatives related to sale of subsidiaries

 
(10,297
)
Business acquisitions, net of cash acquired
(835
)
 

Proceeds from affiliates
85

 

Payments (to) from related parties
(593
)
 
1,045

Change in restricted cash and investments
(639
)
 
(9,629
)
Net cash (used in) provided by investing activities
(95,652
)
 
227,669

Cash flows from financing activities
 
 
 
Proceeds from issuance of long-term debt, net of original issue discount
2,110,859

 
262,696

Payments on long-term debt
(2,415,530
)
 
(477,008
)
Payments of deferred purchase price for acquisitions
(6,329
)
 
(7,746
)
Payments to purchase noncontrolling interests

 
(25,665
)
Proceeds from issuance of convertible redeemable preferred stock, net of issuance costs
55,290

 

Payment of dividends to noncontrolling interest holders

 
(89
)
Proceeds from initial public offering, net of issuance costs
456,561

 

Proceeds from exercise of stock options

 
245

Withholding of shares to satisfy tax withholding for vested stock awards and exercised stock options
(1,277
)
 
(1,308
)
Payments of debt issuance costs
(11,244
)
 
(1,443
)
Noncontrolling interest holder's loan to subsidiaries
943

 
492

Distributions to noncontrolling interest holders
(847
)
 
(1,447
)
Net cash provided by (used in) financing activities
188,426

 
(251,273
)
Effects of exchange rate changes on cash
15,094

 
14,449

Change in cash included in current assets held for sale

 
(1,337
)
Net change in cash and cash equivalents
(97,802
)
 
(73,905
)
Cash and cash equivalents at beginning of period
464,965

 
458,673

Cash and cash equivalents at end of period
$
367,163

 
$
384,768

The accompanying notes are an integral part of these consolidated financial statements.

8




Laureate Education, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(Dollars and shares in thousands)
Note 1. Description of Business

Laureate Education, Inc. and subsidiaries (hereinafter Laureate, we, us, our, or the Company) provide higher education programs and services to students through an international network of licensed universities and higher education institutions (institutions). Laureate's programs are provided through institutions that are campus-based and internet-based, or through electronically distributed educational programs (online). On October 1, 2015, we redomiciled in Delaware as a public benefit corporation as a demonstration of our long-term commitment to our mission to benefit our students and society.
 
On February 6, 2017, the Company completed an initial public offering (IPO) of shares of its Class A common stock, a newly established class of the Company’s common stock of which 700,000 shares were authorized and, as of February 1, 2017, the Company's shares became listed on the Nasdaq Global Select Market under the symbol ‘‘LAUR’’. The Company sold 35,000 shares of its Class A common stock in the IPO at a price of $14.00 per share, resulting in net proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses payable by us, of $456,561. On January 31, 2017, in connection with our IPO, our Amended and Restated Certificate of Incorporation was accepted for filing by the Secretary of State of the State of Delaware, and effective upon such filing, a 4 to 1 reverse stock split for our common stock was consummated and each share of our common stock then outstanding was automatically reclassified into one fourth of one share of Class B Common Stock, a newly established class of the Company’s common stock, with any resulting fractional shares rounded down to the next whole share. These financial statements reflect the reverse stock split.

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, these financial statements include all adjustments considered necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. These unaudited Consolidated Financial Statements should be read in conjunction with Laureate's audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the 2016 Form 10-K).

Note 2. Significant Accounting Policies

The Variable Interest Entity (VIE) Arrangements

Laureate consolidates in its financial statements certain internationally based educational organizations that do not have shares or other equity ownership interests. Although these educational organizations may be considered not-for-profit entities in their home countries and they are operated in compliance with their respective not-for-profit legal regimes, we believe they do not meet the definition of a not-for-profit entity under GAAP, and therefore we treat them as "for-profit" entities for accounting purposes. These entities generally cannot declare dividends or distribute their net assets to the entities that control them.
Under ASC Topic 810-10, "Consolidation," we have determined that these institutions are VIEs and that Laureate is the primary beneficiary of these VIEs because we have, as further described herein: (1) the power to direct the activities of the VIEs that most significantly affect their educational and economic performance and (2) the right to receive economic benefits from contractual and other arrangements with the VIEs that could potentially be significant to the VIEs. We account for the acquisition of the right to control a VIE in accordance with ASC 805, "Business Combinations."


9




Selected Consolidated Statements of Operations information for these VIEs was as follows:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Selected Statements of Operations information:
 
 
 
 
 
 
 
Revenues, by segment:
 
 
 
 
 
 
 
LatAm
$
153,262

 
$
112,223

 
$
216,948

 
$
169,430

EMEAA
67,302

 
73,233

 
133,515

 
145,568

Revenues
220,564

 
185,456

 
350,463

 
314,998

 
 
 
 
 
 
 
 
Depreciation and amortization
12,651

 
12,974

 
25,473

 
25,768

 
 
 
 
 
 
 
 
Operating income (loss), by segment:
 
 
 
 
 
 
 
LatAm
31,514

 
(2,009
)
 
(9,554
)
 
(42,598
)
EMEAA
8,019

 
8,910

 
19,895

 
19,665

Operating income (loss)
39,533

 
6,901

 
10,341

 
(22,933
)
 
 
 
 
 
 
 
 
Net income (loss)
43,152

 
9,486

 
23,040

 
(20,080
)
Net income (loss) attributable to Laureate Education, Inc.
41,955

 
8,134

 
21,019

 
(21,181
)

The following table reconciles the Net income (loss) attributable to Laureate Education, Inc. as presented in the table above, to the amounts in our Consolidated Statements of Operations:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss) attributable to Laureate Education, Inc.:
 
 
 
 
 
 
 
Variable interest entities
$
41,955

 
$
8,134

 
$
21,019

 
$
(21,181
)
Other operations
183,817

 
277,470

 
214,374

 
325,580

Corporate and eliminations
(109,386
)
 
61,785

 
(241,815
)
 
(60,177
)
Net income (loss) attributable to Laureate Education, Inc.
$
116,386

 
$
347,389

 
$
(6,422
)
 
$
244,222


10





The following table presents selected assets and liabilities of the consolidated VIEs. Except for Goodwill, the assets in the table below include the assets that can be used only to settle the obligations for the VIEs. The liabilities in the table are liabilities for which the creditors of the VIEs do not have recourse to the general credit of Laureate.

Selected Consolidated Balance Sheet amounts for these VIEs were as follows:
 
June 30, 2017
 
December 31, 2016
 
VIE
 
Consolidated
 
VIE
 
Consolidated
Balance Sheets data:
 
 
 
 
 
 
 
Cash and cash equivalents
$
114,684

 
$
367,163

 
$
169,074

 
$
464,965

Other current assets
235,994

 
875,319

 
153,136

 
650,836

Total current assets
350,678

 
1,242,482

 
322,210

 
1,115,801

Goodwill
188,620

 
2,020,620

 
181,669

 
1,934,464

Tradenames
106,005

 
1,332,523

 
104,117

 
1,307,633

Other intangible assets, net

 
44,735

 

 
46,700

Other long-term assets
695,350

 
2,729,376

 
701,117

 
2,657,872

Total assets
1,340,653

 
7,369,736

 
1,309,113

 
7,062,470

 
 
 
 
 
 
 
 
Current liabilities
295,819

 
1,415,202

 
320,922

 
1,440,232

Long-term debt and other long-term liabilities
109,362

 
4,249,375

 
103,375

 
4,601,013

Total liabilities
405,181

 
5,664,577

 
424,297

 
6,041,245

 
 
 
 
 
 
 
 
Total stockholders' equity
935,472

 
1,447,607

 
884,816

 
664,392

Total stockholders' equity attributable to Laureate Education, Inc.
915,158

 
1,412,953

 
866,997

 
632,210


Recently Issued Accounting Standards Not Yet Adopted

Accounting Standards Update (ASU) No. 2017-04 (ASU 2017-04), Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment

In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04 in order to simplify the test for goodwill impairment by eliminating Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Under the amendments in this ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for Laureate beginning on January 1, 2020 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are still evaluating the impact of ASU 2017-04 on our Consolidated Financial Statements and whether we will early adopt this ASU.

ASU No. 2016-02 (ASU 2016-02), Leases (Topic 842)

On February 25, 2016, the FASB issued ASU 2016-02. Lessees will need to recognize on their balance sheet a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The standard is effective for Laureate beginning January 1, 2019. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are completing our diagnostic assessment and assessing the data that will be used to transition to the new standard. We anticipate that ASU 2016-02 will have a material impact on our Consolidated Balance Sheets, as we will record significant

11




asset and liability balances in connection with our leased properties. We are still evaluating the impact to our Consolidated Statements of Operations.

ASU No. 2014-09, (ASU 2014-09): Revenue from Contracts with Customers (Topic 606)

On May 28, 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements in Topic 605, ‘‘Revenue Recognition’’ and most industry-specific guidance. The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09. The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Laureate) and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. We have completed our diagnostic assessment and are designing policies and processes to implement this ASU, which we plan to adopt effective January 1, 2018. We do not expect the adoption of this ASU to result in a significant change to our method of recognizing tuition revenues; however, we are still evaluating other components of revenue. We plan to elect modified retrospective adoption of this new standard.

Recently Adopted Accounting Standards

ASU No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740)

In November 2015, the FASB issued ASU 2015-17 as a part of the Simplification Initiative and in response to concerns that the current requirement that entities separate deferred income tax liabilities and assets into current and noncurrent amounts results in little or no benefit to users of the financial statements. The amendments in this ASU aim to simplify this presentation by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 was effective for Laureate beginning January 1, 2017 and we adopted this guidance on a retrospective basis. Accordingly, as of June 30, 2017 all deferred tax assets and liabilities are classified as noncurrent and we reclassified current deferred tax assets and liabilities of approximately $110,000 and $6,000, respectively, as of December 31, 2016 to noncurrent.

ASU No. 2016-09 (ASU 2016-09), Compensation—Stock compensation (Topic 718): Improvements to Employee Share-based Payment Accounting

On March 30, 2016, the FASB issued ASU 2016-09 as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this ASU involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance was effective for Laureate beginning January 1, 2017. Laureate has elected to continue estimating forfeitures when determining the amount of share-based compensation expense to be recognized each period. The Company adopted this standard prospectively in the first quarter of 2017 and it did not have a material impact on our Consolidated Financial Statements.


12




Note 3. Acquisitions

2017 Acquisitions

During the three months ended June 30, 2017, Laureate consummated the business acquisition outlined below, which is included in our Consolidated Financial Statements commencing from the date of acquisition.

Australia

In June 2017, our EMEAA segment acquired the assets and business of the nursing division of Careers Australia (CA Nursing), a vocational institution in Australia, for a cash purchase price of AUD 1,107 (US $835 at the date of acquisition) plus debt assumed of AUD 9,850 (US $7,433 at the acquisition date). We accounted for this acquisition as a business combination. For this acquisition, Revenues, Operating income and Net (loss) income attributable to Laureate Education, Inc. were immaterial for the three months ended June 30, 2017.

The Consolidated Financial Statements include the operating results of CA Nursing from the date of acquisition. The following table summarizes the estimated fair value of all assets acquired and the liabilities assumed at the date of acquisition.

CA Nursing
Australia
Current assets
$
610

Property and equipment
9,657

Goodwill
1,791

Other intangible assets
3,988

   Total assets acquired
16,046

Current portion of long-term debt
166

Other current liabilities
6,034

Long-term debt, less current portion
7,267

Other long-term liabilities
1,744

   Total liabilities
15,211

Net assets acquired attributable to Laureate Education, Inc.
835

Debt assumed
7,433

Net assets acquired attributable to Laureate Education, Inc. plus debt assumed
$
8,268



Net assets acquired
$
835

Net cash paid at acquisition
$
835


2017 Summary

The amounts recorded in the 2017 acquisition are provisional and Laureate is in the process of finalizing the amounts recorded for the assets and liabilities primarily related to goodwill, intangible assets and deferred revenue. None of the goodwill related to the 2017 acquisition is expected to be deductible for income tax purposes.


13




Note 4. Due to Shareholders of Acquired Companies

The amounts due to shareholders of acquired companies generally arise in connection with Laureate’s acquisition of a majority or all of the ownership interest of these companies. Promissory notes payable to the sellers of acquired companies, referred to as “seller notes,” are commonly used as a means of payment for business acquisitions. Seller note payments are generally classified as Payments of deferred purchase price for acquisitions within financing activities in our Consolidated Statements of Cash Flows. The amounts due to shareholders of acquired companies, currencies, and interest rates applied were as follows:
 
June 30, 2017
December 31, 2016
Nominal Currency
Interest
Rate %
Faculdades Metropolitanas Unidas Educacionais (FMU)
$
105,811

$
100,382

BRL
CDI
Universidade Anhembi Morumbi (UAM Brazil)
54,435

52,043

BRL
CDI + 2%
Monash South Africa (MSA)
30,081

27,462

AUD
n/a, 6.75%
University of St. Augustine for Health Sciences, LLC
(St. Augustine)
11,550

11,550

USD
7%
Universidad Tecnologica Centroamericana (UNITEC Honduras)
4,566

5,196

HNL
IIBC
CH Holding Netherlands B.V. (CH Holding)
3,798

8,587

USD
n/a
Faculdade-Porto-Alegrense (FAPA)
2,952

2,973

BRL
IGP-M
IADE Group
2,270

2,755

EUR
3%
Total due to shareholders of acquired companies
215,463

210,948

 
 
Less: Current portion of due to shareholders of acquired companies
133,083

118,679

 
 
Due to shareholders of acquired companies, less current portion
$
82,380

$
92,269

 
 
AUD: Australian Dollar
 
CDI: Certificados de Depósitos Interbancários (Brazil)
BRL: Brazilian Real
 
IIBC: Índice de Inflación del Banco Central (Honduras)
EUR: European Euro
 
IGP-M: General Index of Market Prices (Brazil)
HNL: Honduran Lempira
 
 
USD: United States Dollar
 
 

IADE Group

A working capital adjustment was recorded during the year ended December 31, 2015 in accordance with the purchase agreement entered into in connection with this acquisition. This liability of EUR 639 (US $694 at the date of payment) was settled during the quarter ended June 30, 2017. The remaining balance outstanding relates to two EUR 1,000 tranches to be paid 36 months and 60 months from the March 27, 2015 date of acquisition.

14




Note 5. Business and Geographic Segment Information

Laureate’s educational services are offered through three operating segments: LatAm, EMEAA (as defined below) and GPS. Laureate determines its operating segments based on information utilized by the chief operating decision maker to allocate resources and assess performance.

As previously disclosed in our 2016 Form 10-K and our Quarterly Report on Form 10-Q for the period ended March 31, 2017, effective March 31, 2017, we combined our previously separate Europe and AMEA segments in order to reflect our belief that we will be able to operate the institutions in those segments more successfully and efficiently under common management. The combined segment is called EMEAA (Europe, Middle East, Africa and Asia Pacific). This change has been reflected in the quarterly segment information beginning in the first quarter of 2017, the period in which the change occurred. As required, the 2016 segment information that is presented for comparative purposes has also been revised to reflect this segment change.

The LatAm segment consists of campus-based institutions and has operations in Brazil, Chile, Costa Rica, Honduras, Mexico, Panama and Peru and has contractual relationships with a licensed institution in Ecuador. These institutions offer an education that emphasizes professional-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines. The programs at these institutions are mainly campus-based and are primarily focused on local students. In addition, the institutions in our LatAm segment have begun introducing online and hybrid (a combination of online and in-classroom) courses and programs to their curriculum. Brazil and Chile have government-sponsored student financing programs, while in other countries students generally finance their own education.

The EMEAA segment consists of campus-based institutions with operations in the European countries of Cyprus, Germany, Italy, Portugal, Spain and Turkey as well as locations in the Middle East, Africa and Asia Pacific consisting of campus-based institutions with operations in Australia, China, India, Malaysia, Morocco, New Zealand, South Africa and Thailand. Additionally, EMEAA manages nine licensed institutions in the Kingdom of Saudi Arabia and manages one additional institution in China through a joint venture arrangement. These institutions generate revenues by providing professional-oriented undergraduate and graduate degree programs. Several institutions have begun to introduce online and hybrid programs. Students in the EMEAA segment typically self-finance their education or seek third-party financing programs. In certain markets in the EMEAA segment, such as Australia and to a lesser extent China, Thailand and Malaysia, there are various forms of government-supported student financing programs. In the Kingdom of Saudi Arabia, our students' tuition is fully funded by the government.

The GPS segment consists of accredited online institutions, which serve students globally, and campus-based institutions serving students in the United States. The online institutions primarily serve working adults with undergraduate and graduate degree programs. The campus-based institutions primarily serve traditional students seeking undergraduate and graduate degrees. In the United States, students have access to government-supported financing programs.

Intersegment transactions are accounted for in a similar manner as third party transactions and are eliminated in consolidation. The “Corporate” amounts presented in the following tables includes corporate charges that were not allocated to our reportable segments and adjustments to eliminate intersegment items.

We evaluate segment performance based on Adjusted EBITDA, which is a non-GAAP profit measure defined as Income (loss) from continuing operations before income taxes and equity in net income of affiliates, adding back the following items: (Loss) gain on sales of subsidiaries, net, Foreign currency exchange (loss) gain, net, Other income (expense), net, Gain (loss) on derivatives, Loss on debt extinguishment, Interest expense, Interest income, Depreciation and amortization expense, Loss on impairment of assets, Share-based compensation expense and expenses related to our Excellence-in-Process (EiP) initiative. EiP is an enterprise-wide initiative to optimize and standardize Laureate’s processes, creating vertical integration of procurement, information technology, finance, accounting and human resources. It includes the establishment of regional shared services organizations (SSOs) around the world, as well as improvements to the Company's system of internal controls over financial reporting. The increased EiP expenses during the six months ended June 30, 2017 as compared to the six months ended June 30, 2016 relates primarily to severance costs that are predominantly contractual termination benefits recognized in accordance with ASC 712, ‘‘Compensation—Nonretirement Postemployment Benefits.’’

When we review Adjusted EBITDA on a segment basis, we exclude intercompany revenues and expenses, related to network fees and royalties between our segments, which eliminate in consolidation. We use total assets as the measure of assets for reportable segments.

Effective August 1, 2017, we changed our operating segments; see Note 18, Subsequent Events, for further description.


15




The following tables provide financial information for our reportable segments, including a reconciliation of Adjusted EBITDA to Income (loss) from continuing operations before income taxes and equity in net income of affiliates, as reported in the Consolidated Statements of Operations:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2017
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
LatAm
$
831,118

$
733,255

 
$
1,252,554

 
$
1,137,152

EMEAA
245,480

261,084

 
472,665

 
505,097

GPS
204,595

241,656

 
412,885

 
502,081

Corporate
(3,754
)
(4,085
)
 
(4,732
)
 
(5,886
)
Revenues
$
1,277,439

$
1,231,910

 
$
2,133,372

 
$
2,138,444

Adjusted EBITDA of reportable segments
 
 
 
 
 
 
LatAm
$
300,025

$
224,073

 
$
264,236

 
$
203,847

EMEAA
52,891

52,748

 
106,340

 
107,210

GPS
54,825

65,265

 
118,429

 
134,993

Total Adjusted EBITDA of reportable segments
407,741

342,086

 
489,005

 
446,050

Reconciling items:
 
 
 
 
 
 
Corporate
(65,913
)
(33,884
)
 
(98,580
)
 
(63,876
)
Depreciation and amortization expense
(66,950
)
(69,704
)
 
(131,465
)
 
(135,911
)
Loss on impairment of assets


 

 

Share-based compensation expense
(12,949
)
(13,745
)
 
(35,337
)
 
(20,909
)
EiP expenses
(18,079
)
(14,185
)
 
(42,640
)
 
(25,943
)
Operating income
243,850

210,568

 
180,983

 
199,411

Interest income
4,460

4,062

 
9,154

 
9,868

Interest expense
(98,962
)
(105,833
)
 
(201,595
)
 
(209,602
)
Loss on debt extinguishment
(6,915
)
(1,681
)
 
(8,430
)
 
(1,681
)
Gain (loss) on derivatives
26,970

1,999

 
39,117

 
(8,751
)
Other (expense) income, net
(380
)
(1,276
)
 
56

 
(1,317
)
Foreign currency exchange (loss) gain, net
(9,726
)
26,252

 
(7,436
)
 
53,934

(Loss) gain on sales of subsidiaries, net
(172
)
243,261

 
(172
)
 
243,261

Income from continuing operations before income taxes and equity in net income of affiliates
$
159,125

$
377,352

 
$
11,677

 
$
285,123


 
June 30, 2017
December 31, 2016
Assets
 
 
LatAm
$
4,099,520

$
3,932,679

EMEAA
1,355,507

1,333,297

GPS
1,438,153

1,505,242

Corporate
476,556

291,252

Total assets
$
7,369,736

$
7,062,470




16




Note 6. Goodwill

The change in the net carrying amount of Goodwill from December 31, 2016 through June 30, 2017 was composed of the following items:
 
LatAm
 
EMEAA
 
GPS
 
Total
Goodwill
$
1,313,046

 
$
243,861

 
$
537,452

 
$
2,094,359

Accumulated impairment loss
(77,094
)
 
(63,141
)
 
(19,660
)
 
(159,895
)
Balance at December 31, 2016
1,235,952

 
180,720

 
517,792

 
1,934,464

Acquisitions

 
1,791

 

 
1,791

Dispositions

 
(488
)
 

 
(488
)
Impairments

 

 

 

Currency translation adjustments
72,478

 
11,769

 
606

 
84,853

Adjustments to prior acquisitions

 

 

 

Balance at June 30, 2017
$
1,308,430

 
$
193,792

 
$
518,398

 
$
2,020,620


Note 7. Debt

Outstanding long-term debt was as follows:
 
June 30, 2017
 
December 31, 2016
Senior long-term debt:
 
 
 
Senior Secured Credit Facility (stated maturity dates April 2022 and April 2024 as of June 30, 2017; stated maturity dates June 2018, June 2019 and March 2021 as of December 31, 2016), net of discount
$
1,580,352

 
$
1,497,869

Senior Notes (stated maturity dates May 2025 and September 2019), net of discount
1,048,662

 
1,388,036

Total senior long-term debt
2,629,014

 
2,885,905

Other debt:
 
 
 
Lines of credit
65,971

 
66,081

Notes payable and other debt
660,434

 
650,184

Total senior and other debt
3,355,419

 
3,602,170

Capital lease obligations and sale-leaseback financings
260,651

 
250,842

Total long-term debt
3,616,070

 
3,853,012

Less: total unamortized deferred financing costs
111,789

 
44,648

Less: current portion of long-term debt
212,568

 
178,989

Long-term debt, less current portion
$
3,291,713

 
$
3,629,375


Debt Refinancing

During the second quarter of 2017, the Company completed refinancing transactions that resulted in repayment of the previous senior credit facility and the redemption of the 9.250% Senior Notes due 2019 (the Senior Notes due 2019) (other than $250,000 in aggregate principal amount of the Senior Notes due 2019 that the Company exchanged on April 21, 2017 for substantially identical but non-redeemable notes issued under a new indenture (the Exchanged Notes)).

Senior Notes

On April 26, 2017, we completed an offering of $800,000 aggregate principal amount of 8.250% Senior Notes due 2025 (the Senior Notes due 2025). The Senior Notes due 2025 were issued at par and will mature on May 1, 2025. Interest on the Senior Notes due 2025 is payable semi-annually on May 1 and November 1, and the first interest payment date is November 1, 2017.We may redeem the Senior Notes due 2025, in whole or in part, at any time on or after May 1, 2020, at redemption prices starting at 106.188% of the principal amount thereof and decreasing from there each year thereafter until May 1, 2023, plus accrued and unpaid interest. From and after May 1, 2023, we may redeem all or part of the Senior Notes due 2025 at a redemption price of 100%, plus accrued and unpaid interest. We may also redeem up to 40% of the Senior Notes due 2025 using the proceeds of certain

17




equity offerings completed before May 1, 2020, at a redemption price equal to 108.250% of the principal amount thereof, plus accrued and unpaid interest. In addition, at any time prior to May 1, 2020, we may redeem the Senior Notes due 2025, in whole or in part, at a price equal to 100% of the principal amount, plus a ‘‘make-whole’’ premium, plus accrued and unpaid interest.

On April 28, 2017, the Company elected to redeem all of its outstanding Senior Notes due 2019 (other than the Exchanged Notes) and on May 31, 2017 (the Redemption Date), the Senior Notes due 2019 (other than the Exchanged Notes) were redeemed. The Exchanged Notes were not redeemed and remained outstanding as of June 30, 2017, net of discount. The aggregate principal amount outstanding of the Senior Notes due 2019 (excluding the Exchanged Notes) was $1,125,443. The redemption price for the Senior Notes due 2019 that were redeemed was equal to 104.625% of the principal amount thereof, for a total redemption price of $1,177,495, plus accrued and unpaid interest and special interest to the Redemption Date, for an aggregate payment to holders of the Senior Notes of $1,205,630. As of June 30, 2017, the outstanding balance of our senior notes was $1,048,662, which consisted of $800,000 of Senior Notes due 2025 and $248,662 of the Exchanged Notes, net of a debt discount. As of December 31, 2016, the outstanding balance under our Senior Notes due 2019 was $1,388,036, net of a debt discount.

Senior Secured Credit Facility

Substantially concurrently with the issuance of the Senior Notes due 2025, we consummated a refinancing of our Senior Secured Credit Facility by means of an amendment and restatement of the existing amended and restated credit agreement (the Second Amended and Restated Credit Agreement) to provide a new revolving credit facility of $385,000 maturing in April 2022 (the Revolving Credit Facility) and a new syndicated term loan of $1,600,000 maturing in April 2024 (the 2024 Term Loan). The old senior credit facility was fully repaid, and that repayment amount is included in Payments on long-term debt in the Consolidated Statement of Cash Flows for the six months ended June 30, 2017, with the exception of approximately $283,000 of loan principal related to the old term loan that was rolled over by certain lenders into the 2024 Term Loan. Accordingly, that rollover amount was a non-cash transaction.

As a subfacility under the Revolving Credit Facility, the Second Amended and Restated Credit Agreement provides for letter of credit commitments in the aggregate amount of $141,000. The Second Amended and Restated Credit Agreement also provides, subject to the satisfaction of certain conditions, for incremental revolving and term loan facilities, at the request of the Company, not to exceed $300,000 plus additional amounts so long as both immediately before and after giving effect to such incremental facilities the Company’s Consolidated Senior Secured Debt to Consolidated EBITDA ratio, as defined in the Second Amended and Restated Credit Agreement, on a pro forma basis, does not exceed 2.75x.

The maturity date for the Revolving Credit Facility is April 26, 2022 and the maturity date for the 2024 Term Loan is April 26, 2024. The Revolving Credit Facility bears interest at a per annum interest rate, at the option of the Borrower, at either the LIBOR rate or the ABR rate plus an applicable margin of 3.75% per annum or 3.50% per annum for LIBOR rate loans, and 2.75% per annum or 2.50% per annum for ABR rate loans, in each case, based on the Company’s Consolidated Total Debt to Consolidated EBITDA ratio, as defined in the Second Amended and Restated Credit Agreement. As of June 30, 2017, there was no balance outstanding under the Revolving Credit Facility.

The 2024 Term Loan bears interest at a per annum rate, at the option of the Borrower, at either the LIBOR rate or the ABR rate plus an applicable margin of 4.50% per annum or 4.25% per annum for LIBOR rate loans, and 3.50% per annum or 3.25% per annum for ABR rate loans, in each case, based on the Company’s Consolidated Total Debt to Consolidated EBITDA ratio. As of June 30, 2017, all loans outstanding under the 2024 Term Loan were LIBOR loans and had a total interest rate of 5.73%. A discount equal to 1% of the 2024 Term Loan's original principal amount, or $16,000, was paid at issuance and will be amortized to interest expense over the term of the loan. The 2024 Term Loan amortizes at an annual amount equal to 1% of the original principal amount of the 2024 Term Loan, which annual amount is payable in quarterly payments, with the remaining unpaid principal amount payable on the maturity date. Quarterly principal payments on the 2024 Term Loan commenced June 30, 2017. On or prior to October 26, 2017, except for prepayments made from transactions expressly permitted, the 2024 Term Loan can be prepaid at price equal to 101% of the principal amount prepaid. After October 26, 2017, the 2024 Term Loan can be prepaid at price equal to 100% of the principal amount prepaid.

Loss on Debt Extinguishment, Debt Modification and Debt Issuance Costs

As a result of the refinancing transactions described above, Laureate recorded a Loss on debt extinguishment of $6,915 during the three months ended June 30, 2017 related to the write off of unamortized deferred financing costs associated with certain lenders that did not participate in the new debt instruments. In addition, approximately $22,800 was charged to General and administrative expenses related to new third-party costs paid in connection with the portion of the refinancing transactions that was deemed to be a modification. Also in connection with the refinancing transactions, approximately $70,800 of new deferred financing costs

18




were recorded, which related primarily to the excess of the redemption price over the principal amount of the Senior Notes due 2019 that were redeemed and the call premium that applied to a portion of the repaid senior credit facilities.

Estimated Fair Value of Debt

The estimated fair value of our debt was determined using observable market prices, as the majority of our securities, including the Senior Secured Credit Facility and the Senior Notes due 2025, are traded in a brokered market, as were the Senior Notes due 2019 prior to their redemption (other than the Exchanged Notes). The fair value of our remaining debt instruments approximates carrying value based on their terms. As of June 30, 2017 and December 31, 2016, our long-term debt was classified as Level 2 within the fair value hierarchy, based on the frequency and volume of trading in the brokered market. The estimated fair value of our debt was as follows:
 
June 30, 2017
 
December 31, 2016
 
Carrying amount
 
Estimated fair value
 
Carrying amount
 
Estimated fair value
Total senior and other debt
$
3,355,419

 
$
3,417,320

 
$
3,602,170

 
$
3,632,853


Senior Notes due 2019 - Note Exchange Transaction

On April 15, 2016, Laureate entered into separate, privately negotiated note exchange agreements (the Note Exchange Agreements) with certain existing holders (the Existing Holders) of the Senior Notes due 2019 pursuant to which we agreed to exchange (the Note Exchange) $250,000 in aggregate principal amount of Senior Notes due 2019 for shares of the Company's Class A common stock. The exchange is to be completed within one year and one day after the consummation of an initial public offering of our common stock that generates gross proceeds of at least $400,000 or 10% of the equity value of the Company (a Qualified Public Offering). As discussed in Note 1, Description of Business, on February 6, 2017, the Company completed an initial public offering of its Class A common stock at a price per share of $14.00 that qualified as a Qualified Public Offering.

On August 11, 2017, Laureate will issue 18,683 shares of Class A common stock which is equal to 104.625% of the aggregate principal amount of Senior Notes due 2019 to be exchanged, or $261,600, divided by $14.00, the initial public offering price per share of common stock in the Qualified Public Offering. Upon completion of the Note Exchange, the Company will also pay cash to the exchanging holders in an amount equal to the interest and special interest accrued with respect to the Exchanged Notes to, but excluding, the date of consummation of the Note Exchange. Shares of the Company’s Class A common stock to be issued in the Note Exchange have been reserved for issuance by the Company and will be listed on the Nasdaq Global Select Market.

The Note Exchange Agreements also provided that, within 60 days after the consummation of a Qualified Public Offering, at the option of the Existing Holders or their transferees, we would repurchase up to an additional $62,500 aggregate principal amount of Senior Notes due 2019 at the redemption price set forth in Section 3.07 of the indenture governing the Senior Notes due 2019 that is applicable as of the date of pricing of the Qualified Public Offering, plus accrued and unpaid interest and special interest. On March 1, 2017, in accordance with the terms of the Note Exchange Agreements, we repurchased Senior Notes due 2019 with an aggregate principal amount of $22,556 at a repurchase price of 104.625% of the aggregate principal amount, for a total payment of $23,599; the difference was recognized as Loss on debt extinguishment along with the portion of unamortized debt issuance costs that were written off. See Note 18, Subsequent Events, for additional information.

Certain Covenants

As of June 30, 2017, our senior long-term debt contained certain negative covenants including, among others: (1) limitations on additional indebtedness; (2) limitations on dividends; (3) limitations on asset sales, including the sale of ownership interests in subsidiaries and sale-leaseback transactions; and (4) limitations on liens, guarantees, loans or investments. The Second Amended and Restated Credit Agreement provides, solely with respect to the Revolving Credit Facility, that the Company shall not permit its Consolidated Senior Secured Debt to Consolidated EBITDA ratio, as defined in the Second Amended and Restated Credit Agreement, to exceed 4.50x as of the last day of each quarter ending June 30, 2017 through September 30, 2017, 3.75x as of the last day of each quarter ending December 31, 2017 through March 31, 2018, and 3.50x as of the last day of each quarter ending June 30, 2018 and thereafter. However, the agreement also provides that if (i) the Company’s Consolidated Total Debt to Consolidated EBITDA ratio, as defined in the Second Amended and Restated Credit Agreement, is not greater than 4.75x as of such date and (ii) less than 25% of the Revolving Credit Facility is utilized, then such financial covenant shall not apply. As of June 30, 2017, the conditions were satisfied and, therefore, we were not subject to the financial maintenance covenant. In addition, notes payable at some of our locations contain financial maintenance covenants.

19




Note 8. Commitments and Contingencies

Noncontrolling Interest Holder Put Arrangements and Company Call Arrangements

The following section provides a summary table and description of the various noncontrolling interest holder put arrangements that Laureate had outstanding as of June 30, 2017. Laureate has elected to accrete changes in the arrangements’ redemption values over the period from the date of issuance to the earliest redemption date. The redeemable noncontrolling interests are recorded at the greater of the accreted redemption value or the traditional noncontrolling interest. Until the first exercise date, the put instruments’ reported values may be lower than the final amounts that will be required to settle the minority put arrangements. As of June 30, 2017, the carrying value of all noncontrolling interest holder put arrangements was $23,215, which includes accreted incremental value of $22,715 in excess of traditional noncontrolling interests.

If the minority put arrangements were all exercisable at June 30, 2017, Laureate would be obligated to pay the noncontrolling interest holders an estimated amount of $23,215, as summarized in the following table:
 
Nominal Currency
First Exercisable Date
Estimated Value as of June 30, 2017 redeemable within
12-months:
 
Reported
Value
Noncontrolling interest holder put arrangements
 
 
 
 
 
INTI Education Holdings Sdn Bhd (INTI) - 10%
MYR
Current
$
9,828

 
$
9,828

Pearl Retail Solutions Private Limited and Creative Arts Education Society (Pearl) - 45%
INR
Current
13,329

 
13,329

Stamford International University (STIU) - Puttable preferred stock of TEDCO
THB
Current
58

 
58

Total noncontrolling interest holder put arrangements
 
 
23,215

 
23,215

Puttable common stock - currently redeemable
USD
Current
4

 
4

Puttable common stock - not currently redeemable
USD
*

 
2,303

Total redeemable noncontrolling interests and equity
 
 
$
23,219

 
$
25,522

* Contingently redeemable

MYR: Malaysian Ringgit
INR: Indian Rupee
THB: Thai Baht

Laureate’s noncontrolling interest put arrangements are specified in agreements with each noncontrolling interest holder. The terms of these agreements determine the measurement of the redemption value of the put options based on a non-GAAP measure of earnings before interest, taxes, depreciation and amortization (EBITDA, or recurring EBITDA), the definition of which varies for each particular contract.

Commitments and contingencies are generally denominated in foreign currencies.

Pearl

As part of the acquisition of Pearl, the minority owners have a put option to require Laureate to purchase the remaining 45% noncontrolling interest, and Laureate has a call option to require the minority owners to sell to Laureate up to 35% of the total equity of Pearl that is still owned by the noncontrolling interest holders (i.e. approximately 78% of the remaining 45% noncontrolling interest).

On June 19, 2017, Laureate and the noncontrolling interest holders of Pearl amended the put and call option agreements in order to clarify certain aspects of the formula for determining the purchase price of the noncontrolling interests. The modifications to the agreement resulted in the exclusion of certain campus costs and liabilities in the purchase price calculation. As of June 30, 2017, we have recorded the put option at its total estimated redemption value of $13,329.

As described in Note 18, Subsequent Events, on July 11, 2017, the noncontrolling interest holders of Pearl notified Laureate of their election to exercise their put option for a portion of their total noncontrolling interest, which will require Laureate to purchase an additional 35% equity interest in Pearl. The purchase price for the 35% equity interest is approximately $11,500, and has been agreed to by the parties.

20





Series A Convertible Redeemable Preferred Stock Offering

As disclosed in our 2016 Form 10-K, on December 4, 2016, we signed a subscription agreement with six investors, including Kohlberg, Kravis and Roberts Co. L.P. and Snow Phipps Group LLC, both of which are affiliates of ours, pursuant to which we agreed to issue and sell to those investors an aggregate of 400 shares of a new series of our convertible redeemable preferred stock (the Series A Preferred Stock), consisting of 23 shares of Series A-1 Preferred Stock and 377 shares of Series A-2 Preferred Stock, in a private offering for total net proceeds of approximately $383,000. The closing of this transaction, for 343 shares, occurred on December 20, 2016 and we received net proceeds, after issuance costs, of approximately $328,000. One investor funded a portion of its purchase price for 57 shares, equal to $57,000 (approximately $55,000 net of issuance costs), in January 2017. The issuance costs are being accreted to the carrying value of the Series A Preferred Stock over the five-year redemption period.

The Series A Preferred Stock includes a Beneficial Conversion Feature (BCF) that was contingent on a qualified IPO (as defined in the Certificate of Designations governing the terms of the Series A Preferred Stock), which was consummated on February 6, 2017. Accordingly, during the first quarter of 2017, the Company recorded the BCF at its estimated fair value of $261,794 as a reduction of the carrying value of the Series A Preferred Stock and an increase to Additional Paid-In Capital. Beginning in the first quarter of 2017, the accretion of this BCF reduces net income available to common stockholders in the calculation of earnings per share, as shown in Note 14, Earnings (Loss) Per Share. The BCF will be accreted using a constant yield approach over a one-year period. For the six months ended June 30, 2017, we have recorded total accretion on the Series A Preferred Stock of $101,194, and as of June 30, 2017 the Series A Preferred Stock had a carrying value of $232,030. As of December 31, 2016, prior to the January 2017 funding of purchase price for the additional 57 shares of Series A Preferred Stock, and prior to the IPO and the recording of the IPO-contingent BCF, the Series A Preferred Stock had a carrying value of $332,957.

Other Loss Contingencies

Laureate is subject to legal actions arising in the ordinary course of its business. In management's opinion, we have adequate legal defenses, insurance coverage and/or accrued liabilities with respect to the eventuality of such actions. We do not believe that any settlement would have a material impact on our Consolidated Financial Statements.

Contingent Liabilities for Taxes

As of June 30, 2017 and December 31, 2016, Laureate has recorded cumulative liabilities totaling $61,290 and $67,192, respectively, for taxes other-than-income tax, principally payroll-tax-related uncertainties due to acquisitions of companies primarily in LatAm. The changes in this recorded liability are related to acquisitions, interest and penalty accruals, changes in tax laws, expirations of statutes of limitations, settlements and changes in foreign currency exchange rates. The terms of the statutes of limitations on these contingencies vary but can be up to 10 years. This liability is included in Other long-term liabilities on the Consolidated Balance Sheets. We have also recorded current liabilities for taxes other-than-income tax of $1,205 and $1,896, respectively, as of June 30, 2017 and December 31, 2016, in Other current liabilities on the Consolidated Balance Sheets. The recorded value of contingent liabilities is reduced when they are extinguished or the related statutes of limitations expire.

In addition, as of June 30, 2017 and December 31, 2016, Laureate has recorded cumulative liabilities for income tax contingencies of $108,542 and $103,471, respectively. In addition, we have identified certain tax-related contingencies that we have assessed as being reasonably possible of loss, but not probable of loss, and could have an adverse effect on the Company’s results of operations if the outcomes are unfavorable. In most cases, Laureate has received indemnifications from the former owners and/or noncontrolling interest holders of the acquired businesses for contingencies, and therefore, we do not believe we will sustain an economic loss even if we are required to pay these additional amounts. As of June 30, 2017 and December 31, 2016, indemnification assets primarily related to acquisition contingencies were $93,203 and $97,607, respectively. These indemnification assets primarily covered contingencies for income taxes and taxes other-than-income taxes.

Other Loss Contingencies

Laureate has accrued liabilities for certain civil actions against our institutions, a portion of which existed prior to our acquisition of these entities. As of June 30, 2017 and December 31, 2016, approximately $22,000 and $18,000, respectively, of loss contingencies were included in Other long-term liabilities and Other current liabilities on the Consolidated Balance Sheets. Laureate intends to vigorously defend against these lawsuits.

Hunan International Economics University (HIEU), our institution in China, is named as one of five defendants in a civil case involving a loan transaction that was entered into by certain noncontrolling interest holders of HIEU as borrowers, and was allegedly

21




guaranteed by HIEU. The amount of the loan is approximately $29,000, including interest and penalties. The noncontrolling interest holders are the primary defendants in this civil case, with HIEU added in its alleged role as guarantor. Due to developments in the case that occurred during the second quarter of 2017, we determined that the probability of incurring a loss in this legal matter became reasonably possible as of June 30, 2017, but not probable, and therefore a liability has not been recorded. HIEU intends to defend itself in this matter.

Material Guarantees – Student Financing

Chile

The accredited Chilean institutions in the Laureate network also participate in a government-sponsored student financing program known as Crédito con Aval del Estado (the CAE Program). The CAE Program was formally implemented by the Chilean government in 2006 to promote higher education in Chile for lower socio-economic level students in good academic standing. The CAE Program involves tuition financing and guarantees that are provided by our institutions and the government. As part of the CAE Program, these institutions provide guarantees which result in contingent liabilities to third-party financing institutions, beginning at 90% of the tuition loans made directly to qualified students enrolled through the CAE Program and declining to 60% over time. The guarantees by these institutions are in effect during the period in which the student is enrolled, and the guarantees are assumed entirely by the government upon the student’s graduation. When a student leaves one of Laureate's institutions and enrolls in another CAE-qualified institution, the Laureate institution will remain guarantor of the tuition loans that have been granted up to the date of transfer, and until the student's graduation from a CAE-qualified institution. The maximum potential amount of payments our institutions could be required to make under the CAE Program was approximately $496,000 and $479,000 at June 30, 2017 and December 31, 2016, respectively. This maximum potential amount assumes that all students in the CAE Program do not graduate, so that our guarantee would not be assigned to the government, and that all students default on the full amount of the CAE-qualified loan balances. As of June 30, 2017 and December 31, 2016, we recorded $27,854 and $20,636, respectively, as estimated long-term guarantee liabilities for these obligations.

Material Guarantees – Other

In conjunction with the purchase of UNP, Laureate pledged all of the acquired shares as a guarantee of our payments of rents as they become due. In the event that we default on any payment, the pledge agreement provides for a forfeiture of the relevant pledged shares. In the event of forfeiture, Laureate may be required to transfer the books and management of UNP to the former owners.

Laureate acquired the remaining 49% ownership interest in UAM Brazil in April 2013. As part of the agreement to purchase the 49% ownership interest, Laureate pledged 49% of its total shares in UAM Brazil as a guarantee of our payment obligations under the purchase agreement. In the event that we default on any payment, the agreement provides for a forfeiture of the pledged shares.

In connection with the purchase of FMU on September 12, 2014, Laureate pledged 75% of the acquired shares to third-party lenders as a guarantee of our payment obligations under the loans that financed a portion of the purchase price. Laureate pledged the remaining 25% of the acquired shares to the sellers as a guarantee of our payment obligations under the purchase agreement for the seller notes. In the event that we default on any payment of the loans or seller notes, the purchase agreement provides for a forfeiture of the relevant pledged shares. Upon maturity and payment of the seller notes in September 2017, the shares pledged to the sellers will be pledged to the third-party lenders until full payment of the loans, which mature in April 2021.

Standby Letters of Credit, Surety Bonds and Other Commitments

As of June 30, 2017 and December 31, 2016, Laureate's outstanding letters of credit (LOCs) and surety bonds primarily consisted of the items discussed below.

As of both June 30, 2017 and December 31, 2016, we had approximately $105,600 posted as LOCs in favor of the United States Department of Education (DOE). These LOCs were required to allow Walden, Kendall, NewSchool, and St. Augustine to continue participating in the DOE Title IV program. These LOCs are fully collateralized with cash equivalents and certificates of deposit, which are classified as Restricted cash and investments on our June 30, 2017 Consolidated Balance Sheet.

As of June 30, 2017 and December 31, 2016, we had $37,768 and $34,746, respectively, posted as cash-collateral for LOCs related to the Spain Tax Audits. The cash collateral for these LOCs was classified as Restricted cash and investments on our June 30, 2017 Consolidated Balance Sheet.

22





As part of our normal operations, our insurers issue surety bonds on our behalf, as required by various state education authorities in the United States. We are obligated to reimburse our insurers for any payments made by the insurers under the surety bonds. As of June 30, 2017 and December 31, 2016, the total face amount of these surety bonds was $11,544 and $12,162, respectively. These bonds are fully collateralized with cash, which is classified as Restricted cash and investments on our June 30, 2017 Consolidated Balance Sheet.

In November 2016, in order to continue participating in Prouni, a federal program that offers tax benefits designed to increase higher education participation rates in Brazil, UAM Brazil posted a guarantee in the amount of $15,300. In connection with the issuance of the guarantee, UAM Brazil obtained a non-collateralized surety bond from a third party in order to secure the guarantee. The cost of the surety bond was $1,400, of which half was reimbursed by the former owner of UAM Brazil, and is being amortized over the five-year term. The Company believes that this matter will not have a material impact on our Consolidated Financial Statements.

Note 9. Financing Receivables

Laureate’s financing receivables consist primarily of trade receivables related to student tuition financing programs with an initial term in excess of one year. We have offered long-term financing through the execution of note receivable agreements with students at some of our institutions. Our disclosures include financing receivables that are classified in our Consolidated Balance Sheets as both current and long-term, reported in accordance with ASC 310, “Receivables.”

Laureate’s financing receivables balances were as follows:
 
June 30, 2017
 
December 31, 2016
Financing receivables
$
24,249

 
$
29,776

Allowance for doubtful accounts
(7,904
)
 
(9,175
)
Financing receivables, net of allowances
$
16,345

 
$
20,601


We do not purchase financing receivables in the ordinary course of our business. We may sell certain receivables that are significantly past due. No material amounts of financing receivables were sold during the periods reported herein.


23




Delinquency is the primary indicator of credit quality for our financing receivables. Receivable balances are considered delinquent when contractual payments on the loan become past due. Delinquent financing receivables are placed on non-accrual status for interest income. The accrual of interest is resumed when the financing receivable becomes contractually current and when collection of all remaining amounts due is reasonably assured. We record an Allowance for doubtful accounts to reduce our financing receivables to their net realizable value. The Allowance for doubtful accounts is based on the age of the receivables, the status of past-due amounts, historical collection trends, current economic conditions, and student enrollment status. Each of our institutions evaluates its balances for potential impairment. We consider impaired loans to be those that are past due one year or greater, and those that are modified as a troubled debt restructuring (TDR). The aging of financing receivables grouped by country portfolio was as follows:
 
Chile
 
Other
 
Total
As of June 30, 2017
 
 
 
 
 
Amounts past due less than one year
$
7,973

 
$
941

 
$
8,914

Amounts past due one year or greater
2,856

 
1,468

 
4,324

Total past due (on non-accrual status)
10,829

 
2,409

 
13,238

Not past due
8,326

 
2,685

 
11,011

Total financing receivables
$
19,155

 
$
5,094

 
$
24,249

 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
Amounts past due less than one year
$
8,711

 
$
834

 
$
9,545

Amounts past due one year or greater
3,899

 
1,482

 
5,381

Total past due (on non-accrual status)
12,610

 
2,316

 
14,926

Not past due
11,758

 
3,092

 
14,850

Total financing receivables
$
24,368

 
$
5,408

 
$
29,776


The following is a rollforward of the Allowance for doubtful accounts related to financing receivables for the six months ended June 30, 2017 and 2016, grouped by country portfolio:
 
Chile
 
Other
 
Total
Balance at December 31, 2016
$
(6,209
)
 
$
(2,966
)
 
$
(9,175
)
Charge-offs
2,033

 
353

 
2,386

Recoveries

 
(9
)
 
(9
)
Reclassifications

 

 

Provision
(1,112
)
 
161

 
(951
)
Currency adjustments
(100
)
 
(55
)
 
(155
)
Balance at June 30, 2017
$
(5,388
)
 
$
(2,516
)
 
$
(7,904
)
 
 
 
 
 
 
Balance at December 31, 2015
$
(7,240
)
 
$
(3,336
)
 
$
(10,576
)
Charge-offs
1,805

 
56

 
1,861

Recoveries

 

 

Reclassifications

 
75

 
75

Provision
(861
)
 
336

 
(525
)
Currency adjustments
(204
)
 
27

 
(177
)
Balance at June 30, 2016
$
(6,500
)
 
$
(2,842
)
 
$
(9,342
)

Restructured Receivables

A TDR is a financing receivable in which the borrower is experiencing financial difficulty and Laureate has granted an economic concession to the student debtor that we would not otherwise consider. When we modify financing receivables in a TDR, Laureate typically offers the student debtor an extension of the loan maturity and/or a reduction in the accrued interest balance. In certain situations, we may offer to restructure a financing receivable in a manner that ultimately results in the forgiveness of contractually specified principal balances. Our only TDRs are in Chile.


24




The number of financing receivable accounts and the pre- and post-modification account balances modified under the terms of a TDR during the six months ended June 30, 2017 and 2016 were as follows:
 
Number of Financing Receivable Accounts
 
Pre-Modification Balance Outstanding
 
Post-Modification Balance Outstanding
2017
326

 
$
1,466

 
$
1,336

2016
436

 
$
7,489

 
$
5,132


The preceding table represents accounts modified under the terms of a TDR during the six months ended June 30, 2017, whereas the following table represents accounts modified as a TDR between January 1, 2016 and June 30, 2017 that subsequently defaulted during the six months ended June 30, 2017:
 
Number of Financing Receivable Accounts
 
Balance at Default
Total
124

 
$
531


The following table represents accounts modified as a TDR between January 1, 2015 and June 30, 2016 that subsequently defaulted during the six months ended June 30, 2016:
 
Number of Financing Receivable Accounts
 
Balance at Default
Total
231

 
$
700


Note 10. Share-based Compensation

Share-based compensation expense was as follows:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2017
 
2016
 
2017
 
2016
Stock options, net of estimated forfeitures
$
9,550

 
$
11,141

 
$
28,831

 
$
16,296

Restricted stock awards
3,399

 
2,390

 
6,506

 
4,315

Total non-cash stock compensation
12,949

 
13,531

 
35,337

 
20,611

Deferred compensation arrangement

 
214

 

 
298

Total
$
12,949

 
$
13,745

 
$
35,337

 
$
20,909


Stock Option Grant

On January 31, 2017, in connection with the Executive Profits Interests (EPI) agreement, we granted our CEO options (the EPI Options) to purchase 2,773 shares of our Class B common stock. The EPI Options vested upon consummation of the IPO on February 6, 2017. The exercise price of the EPI Options is equal to (i) $17.00 with respect to 50% of the shares of Class B common stock subject to the EPI Option and (ii) $21.32 with respect to 50% of the shares of Class B common stock subject to the EPI Option. The EPI Options are exercisable until December 31, 2019. The Company recorded approximately $14,600 of share-based compensation expense for the EPI Options in the first quarter of 2017.

Amendment to 2013 Long-Term Incentive Plan

On June 19, 2017, the Company’s Board of Directors (the Board) approved, subject to stockholder approval, an amendment and restatement of the Laureate Education, Inc. 2013 Long-Term Incentive Plan (as amended and restated, the 2013 Plan). Among other things, the amendment (i) increases the number of shares of Class A common stock that may be issued pursuant to awards under the 2013 Plan to 14,714; (ii) adds performance metrics, the ability to grant cash awards, and annual limits on grants, intended to qualify awards as performance-based awards that are not subject to certain limits on tax deductibility of compensation payable to certain executives; and (iii) extends the term of the 2013 Plan to June 18, 2027, the day before the 10th anniversary of the date of adoption of the amendment. On June 19, 2017, the holder of the majority of the voting power of the Company's outstanding stock (the Majority Holder) approved by written consent the amended and restated 2013 Plan and it became effective.


25




Stock Option Repricing

On June 19, 2017, the Board and the Majority Holder approved a stock option repricing (the Option Repricing). Pursuant to the Option Repricing, the exercise price of each Relevant Option (as defined below) was amended to reduce such exercise price to the average closing price of a share of the Company's Class A common stock as reported on the Nasdaq Global Select Market over the 20 calendar-day period following the mailing of the Notice and Information Statement to our stockholders. The average closing price of the Company's Class A common stock over such 20-day period was $17.44; accordingly, the exercise price of the Relevant Options was adjusted to $17.44.

Relevant Options were all outstanding stock options as of June 19, 2017 (vested or unvested) to acquire shares of Class B common stock granted under the 2013 Plan during calendar years 2013 through 2016, and totaled approximately 5,300 options. Since the modification of the terms of the awards occurred on June 19, 2017, the Company recorded incremental stock compensation expense during the second quarter of 2017 of approximately $5,100 for options that were vested at the modification date. Additionally, approximately $2,500 of incremental stock compensation expense related to options that were not yet vested at the modification date will be recognized over the remaining vesting period.

Note 11. Stockholders' Equity

The components of net changes in stockholders' equity were as follows:
 
Laureate Education, Inc. Stockholders
 
 
 
Class A
Common Stock
Class B
Common Stock
Common Stock
Additional paid-in capital
(Accumulated deficit) retained earnings
Accumulated other comprehensive (loss) income
Non-controlling interests
Total stockholders' equity
 
Shares
Amount
Shares
Amount
Shares
Amount
Balance at December 31, 2016

$


$

133,376

$
534

$
2,721,432

$
(1,037,701
)
$
(1,052,055
)
$
32,182

$
664,392

Non-cash stock compensation






35,337




35,337

Reclassification of Common stock into Class B common stock on January 31, 2017


133,376

534

(133,376
)
(534
)





Issuance of Class A common stock in initial public offering
35,000

140





456,421




456,561

Conversion of Class B shares to Class A shares
444

2

(444
)
(2
)







Vesting of restricted stock and exercise of stock options, net of shares withheld to satisfy tax withholding
23


188

1



(1,278
)



(1,277
)
Reclassification to equity upon expiration of put right on share-based awards






5,500




5,500

Dividends to noncontrolling interests






(587
)



(587
)
Distributions to noncontrolling interest holders









(847
)
(847
)
Accretion of redeemable noncontrolling interests and equity






(6,030
)



(6,030
)
Accretion of Series A Convertible Redeemable Preferred Stock






(101,194
)



(101,194
)
Beneficial conversion feature for Series A Convertible Redeemable Preferred Stock






261,794




261,794

Reclassification of redeemable noncontrolling interests and equity









(736
)
(736
)
Net (loss) income







(6,422
)

3,166

(3,256
)
Foreign currency translation adjustment, net of tax of $0








130,962

889

131,851

Unrealized gain on derivatives, net of tax of $0








6,099


6,099

Balance at June 30, 2017
35,467

$
142

133,120

$
533


$

$
3,371,395

$
(1,044,123
)
$
(914,994
)
$
34,654

$
1,447,607



26




Accumulated Other Comprehensive Income (Loss)    

Accumulated other comprehensive income (AOCI) in our Consolidated Balance Sheets includes the accumulated translation adjustments arising from translation of foreign subsidiaries' financial statements, the unrealized losses on derivatives designated as cash flow hedges, and the accumulated net gains or losses that are not recognized as components of net periodic benefit cost for our minimum pension liability. The components of these balances were as follows:
 
June 30, 2017
 
December 31, 2016
 
Laureate Education, Inc.
Noncontrolling Interests
Total
 
Laureate Education, Inc.
Noncontrolling Interests
Total
Foreign currency translation loss
$
(913,260
)
$
(1,415
)
$
(914,675
)
 
$
(1,044,222
)
$
(2,304
)
$
(1,046,526
)
Unrealized gain (loss) on derivatives
881


881

 
(5,218
)

(5,218
)
Minimum pension liability adjustment
(2,615
)

(2,615
)
 
(2,615
)

(2,615
)
Accumulated other comprehensive loss
$
(914,994
)
$
(1,415
)
$
(916,409
)
 
$
(1,052,055
)
$
(2,304
)
$
(1,054,359
)

Note 12. Derivative Instruments

In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments.

The interest and principal payments for Laureate’s senior long-term debt arrangements are to be paid primarily in USD. Our ability to make debt payments is subject to fluctuations in the value of the USD against foreign currencies, since a majority of our operating cash used to make these payments is generated by subsidiaries with functional currencies other than USD. As part of our overall risk management policies, Laureate has at times entered into foreign currency swap contracts and floating-to-fixed interest rate swap contracts. In addition, we occasionally enter into foreign exchange forward contracts to reduce the impact of other non-functional currency-denominated receivables and payables.

We do not enter into speculative or leveraged transactions, nor do we hold or issue derivatives for trading purposes. We generally intend to hold our derivatives until maturity.

Laureate reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative’s fair value. Gains or losses associated with the change in the fair value of these swaps are recognized in our Consolidated Statements of Operations on a current basis over the term of the contracts, unless designated and effective as a hedge. For swaps that are designated and effective as cash flow hedges, gains or losses associated with the change in fair value of the swaps are recognized in our Consolidated Balance Sheets as a component of AOCI and amortized into earnings as a component of Interest expense over the term of the related hedged items.


27




The reported fair values of our derivatives, which are classified in Derivative instruments on our Consolidated Balance Sheets, were as follows:
 
June 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments:
 
 
 
  Long-term assets:
 
 
 
Interest rate swaps
$
881

 
$

  Current liabilities:
 
 
 
Interest rate swaps

 
5,218

Derivatives not designated as hedging instruments:
 
 
 
Long-term assets:
 
 
 
Contingent redemption features - Series A Preferred Stock
48,290

 
4,464

  Long-term liabilities:
 
 
 
Cross currency and interest rate swaps
7,663

 
7,420

Interest rate swaps
278

 
330

Total derivative instrument assets
$
49,171

 
$
4,464

Total derivative instrument liabilities
$
7,941

 
$
12,968


Derivatives Designated as Hedging Instruments

2024 Term Loan Interest Rate Swaps

In May 2017, Laureate entered into, and designated as cash flow hedges, four pay-fixed, receive-floating amortizing interest rate swaps with notional amounts of $100,000, $100,000, $200,000 and $300,000, respectively. These notional amounts match the corresponding principal of the 2024 Term Loan borrowings of which these swaps are effectively hedging the interest payments. As such, the notional values amortize annually based on the terms of the agreements to match the principal borrowings as they are repaid. Refer to Note 7, Debt, for further information regarding the underlying borrowings. These swaps effectively fix the floating interest rate on the term loan to reduce exposure to variability in cash flows attributable to changes in the USD-LIBOR-BBA swap rate. All four swaps have an effective date of May 31, 2017 and mature on May 31, 2022. The terms of the swaps require Laureate to pay interest on the basis of fixed rates of 1.756%, 1.796%, 1.796% and 1.763% on the $100,000, $100,000, $200,000 and $300,000 notional values, respectively. Laureate will receive interest for all four swaps on the basis of one-month USD-LIBOR-BBA, with a floor of 1%. As of June 30, 2017, these interest rate swaps had an estimated fair value of $881.

Interest Rate Swaps

In September 2011, Laureate entered into two forward interest rate swap agreements that were designated as cash flow hedges. The swaps effectively fixed interest rates on existing variable-rate borrowings in order to manage our exposure to future interest rate volatility. Both swaps had an effective date of June 30, 2014 and matured on June 30, 2017. The terms of the swaps required Laureate to pay interest on the basis of fixed rates of 2.61% on a $450,000 notional amount swap and 2.71% on a $300,000 notional amount swap, and receive interest for both swaps on the basis of three-month LIBOR, with a floor of 1.25%. The gain or loss on these swaps was deferred in AOCI and then reclassified into earnings as a component of Interest expense in the same periods during which the hedged forecasted transactions affected earnings. As of June 30, 2017, all of the gain or loss previously deferred in AOCI had been recognized in earnings since the swaps had matured. As of December 31, 2016, these interest rate swaps had an estimated fair value of $5,218.


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The table below shows the total recorded unrealized gain (loss) of these swaps in Comprehensive income (loss). The impact of derivative instruments designated as hedging instruments on Comprehensive income (loss), Interest expense and AOCI were as follows:

For the three months ended June 30:
 
Gain Recognized in Comprehensive Income
(Effective Portion)
 
 Income Statement Location
 
Loss Reclassified
from AOCI to Income
(Effective Portion)