NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
10
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
.
Nature of Operations and Significant Accounting Policies
Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. We offer undergraduate, graduate, certificate and
nondegree educational programs and services, online and on-campus, principally to working learners in the U.S. and abroad. Refer to
Note 17
,
Segment Reporting
, for further information regarding our institutions and operating segments.
Our fiscal year is from September 1 to August 31.
On February 7, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with AP VIII Queso Holdings, L.P., an affiliate of Apollo Management VIII, L.P., which is a fund managed by an affiliate of Apollo Global Management, LLC, none of which is, or has ever been, affiliated with us. At the effective time of the merger, which is expected to be completed by the end of calendar year 2016, each share of our issued and outstanding Class A and Class B common stock will be converted pursuant to the terms of the Merger Agreement into the right to receive
$10.00
per share in cash. On May 6, 2016, the Merger Agreement was approved by the holders of our outstanding Class A and Class B common stock, each voting separately as a class.
Consummation of the merger is subject to customary and other conditions, including:
|
|
(i)
|
the receipt of consents or approvals from certain federal, state and foreign educational governing bodies, including the Higher Learning Commission; and
|
|
|
(ii)
|
the absence of certain conditions or restrictions in the response of the U.S. Department of Education to the pre-acquisition review application filed by University of Phoenix.
|
In addition, consummation of the merger is subject to our satisfying certain minimum operating metrics, measured as of the first or second month end preceding the closing date, depending on the day of the month on which closing occurs, as follows:
|
|
(i)
|
Our aggregate cash, cash equivalents and marketable securities must not be less than the specified amount for the applicable month end;
|
|
|
(ii)
|
University of Phoenix fiscal year-to-date new degreed enrollments as of the applicable month end must not have declined by more than certain levels (which are derived from the projections we prepared in December 2015 in connection with the merger, which we refer to as the December forecast);
|
|
|
(iii)
|
University of Phoenix trailing twelve month net revenue as of the applicable month end shall not have declined by more than certain levels (which are derived from the December forecast); and
|
|
|
(iv)
|
Our consolidated trailing twelve months adjusted earnings before interest, taxes, depreciation and amortization as of the applicable month end shall not have declined by more than certain levels (which are derived from the December forecast).
|
We currently expect to satisfy these minimum operating metrics if the closing occurs on or prior to October 9, 2016, which is the latest closing date for which the relevant operating metrics are derived from our fiscal year 2016 financial and operating results. However, our expected fiscal year 2016 enrollment and operating results have declined since our December forecast. If our enrollment or operating results continue to decline, we may not be able to satisfy one or more of these closing conditions, either before or after October 9, 2016. If we fail to satisfy one or more of these closing conditions, Parent would be entitled to terminate the Merger Agreement and elect not to consummate the merger.
The Merger Agreement may be terminated by each of us and Parent under certain circumstances, including if the merger is not consummated by 5:00 pm Eastern time on February 1, 2017. Upon termination of the Merger Agreement under certain specified circumstances, but not including a termination solely due to our failure to satisfy the minimum operating metrics described above, we will be required to pay Parent a termination fee of approximately
$27.5 million
, and under other specified circumstances, Parent will be required to pay us a reverse termination fee of
$25.0 million
.
Basis of Presentation
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in our opinion, reflect all adjustments of a normal, recurring nature that are necessary for the fair presentation of our financial condition, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual financial statements. Therefore, this information should be read in conjunction with the audited consolidated financial statements and related notes included in our 2015 Annual Report on Form 10-K as filed with the SEC on October 22, 2015. We consistently applied the accounting policies described in the notes to our consolidated financial statements included in our 2015 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
11
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Use of Estimates
The preparation of these financial statements in accordance with GAAP requires management to make certain estimates, assumptions and judgments that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Although we believe our estimates, assumptions and judgments are reasonable, actual results may differ materially from our estimates under different assumptions, judgments or conditions.
Principles of Consolidation
These financial statements include the assets, liabilities, revenues and expenses of Apollo Education Group, Inc., our wholly-owned subsidiaries, and other subsidiaries that we control. We eliminate intercompany transactions and balances in consolidation.
Seasonality
Our operations are generally subject to seasonal trends, which vary depending on the subsidiary. We have historically experienced, and expect to continue to experience, fluctuations in our results of operations as a result of seasonal variations in the level of our institutions’ enrollments including, but not limited to, the following:
|
|
•
|
University of Phoenix
- University of Phoenix generally has lower net revenue in our second fiscal quarter (December through February) compared to other quarters due to holiday breaks.
|
|
|
•
|
Apollo Global
- Our Apollo Global subsidiaries experience seasonality associated with the timing of when courses begin, exam dates, the timing of their respective holidays and other factors. These factors have historically resulted in lower net revenue in our second and fourth fiscal quarters, particularly for BPP, which also results in substantially lower operating results during these quarters due to BPP’s relatively fixed cost structure.
|
Because of the seasonal nature of our business and other factors, the results of operations for the three and nine months ended
May 31, 2016
are not necessarily indicative of the results to be expected for the fiscal year ending August 31, 2016.
Reclassifications
We reclassified prior periods for the following to conform to our current presentation:
|
|
•
|
During the fourth quarter of fiscal year 2015, we began presenting Carnegie Learning, Inc.’s operating results as discontinued operations on our Condensed Consolidated Statements of Operations. Refer to
Note 3
,
Discontinued Operations
.
|
|
|
•
|
During the first quarter of fiscal year 2016, we began presenting all deferred tax assets and liabilities as noncurrent on our Condensed Consolidated Balance Sheets as discussed further in
New Accounting Standards
below.
|
|
|
•
|
During the second quarter of fiscal year 2016, we began presenting expenses incurred associated with our pending merger discussed above in
Merger, acquisition and other related costs (credit), net
on our Condensed Consolidated Statements of Operations. The associated costs incurred in the first quarter of fiscal year 2016 were included in
General and administrative
and we have reclassified such costs for the nine months ended
May 31, 2016
to conform with our current presentation.
|
New Accounting Standards
Accounting Standards Recently Adopted
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, “
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
”
(“ASU 2015-17”). The standard requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. We early adopted ASU 2015-17 during our first quarter of fiscal year 2016 on a retrospective basis. Accordingly, we reclassified the current deferred taxes to noncurrent on our August 31, 2015 Condensed Consolidated Balance Sheet, which increased noncurrent deferred tax assets
$64.7
million and decreased noncurrent deferred tax liabilities
$3.7
million.
In September 2015, the FASB issued ASU No. 2015-16, “
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
”
(“ASU 2015-16”). The standard requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. ASU 2015-16 is effective for fiscal years, and interim periods within those years,
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
12
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
beginning after December 15, 2015, and early adoption is permitted. We early adopted ASU 2015-16 during our first quarter of fiscal year 2016, which had no impact on our consolidated financial statements, and we will apply the new standard to future adjustments to provisional amounts.
In April 2014, the FASB issued ASU No. 2014-08, “
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
” (“ASU 2014-08”). The standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. We adopted ASU 2014-08 during our first quarter of fiscal year 2016, which had no impact on our consolidated financial statements, and we will apply the new standard to applicable components that are determined to be held for sale or disposed in future periods.
Future Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, “
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
” (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Accordingly, the standard is effective for us on September 1, 2020 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
” (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We do not plan to early adopt ASU 2016-09, and the standard is effective for us on September 1, 2017. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
”
(“ASU 2016-02”). The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on September 1, 2019 using a modified retrospective approach. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, “
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
” (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “
Revenue from Contracts with Customers (Topic 606)
”
(“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
”, which defers the effective date
of ASU 2014-09 by one year to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. Accordingly, the new revenue recognition standard is effective for us on September 1, 2018 using either a full retrospective or a modified retrospective approach. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard:
|
|
•
|
ASU No. 2016-08, “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
”; and
|
|
|
•
|
ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
”.
|
We are currently evaluating which transition approach to use and the impact that the new revenue recognition standards will have on our consolidated financial statements.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
13
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2
.
Restructuring and Impairment Charges
Restructuring and impairment charges include the following for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restructuring charges
|
$
|
22,366
|
|
|
$
|
11,444
|
|
|
$
|
73,673
|
|
|
$
|
46,772
|
|
Goodwill impairments
(1)
|
—
|
|
|
—
|
|
|
73,393
|
|
|
—
|
|
Property and equipment impairments
|
—
|
|
|
—
|
|
|
2,512
|
|
|
5,950
|
|
Restructuring and impairment charges
|
$
|
22,366
|
|
|
$
|
11,444
|
|
|
$
|
149,578
|
|
|
$
|
52,722
|
|
(1)
Refer to
Note 7
,
Goodwill and Intangibles
, for discussion of the goodwill impairment charges recorded during fiscal year 2016.
Restructuring Charges
We have implemented various restructuring activities during prior fiscal years and remain focused on reengineering our business processes and educational delivery systems to reduce costs to align with our lower enrollment and revenue, and to improve the efficiency and effectiveness of our services to students. The activities initiated in prior years and those initiated in fiscal year 2016 are described below. Additionally, we intend to further reduce costs in future periods to align with our lower enrollment and revenue, and expect to incur material charges associated with other future restructuring activities.
The following summarizes the restructuring charges in our segment reporting format for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
University of Phoenix
|
$
|
15,787
|
|
|
$
|
6,043
|
|
|
$
|
46,380
|
|
|
$
|
28,292
|
|
Apollo Global
|
1,183
|
|
|
41
|
|
|
1,902
|
|
|
142
|
|
Other
|
5,396
|
|
|
5,360
|
|
|
25,391
|
|
|
18,338
|
|
Restructuring charges
|
$
|
22,366
|
|
|
$
|
11,444
|
|
|
$
|
73,673
|
|
|
$
|
46,772
|
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
14
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following details the changes in our restructuring liabilities during the nine months ended
May 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease and Related
Costs, Net
|
|
Severance and Other Employee
Separation Costs
|
|
Other Restructuring
Related Costs
|
|
Total
|
($ in thousands)
|
2016 Restructuring
|
|
Prior Year Restructuring
(1)
|
|
2016 Restructuring
|
|
Prior Year Restructuring
(1)
|
|
2016 Restructuring
|
|
Prior Year Restructuring
(1)
|
|
August 31, 2015
|
$
|
—
|
|
|
$
|
74,990
|
|
|
$
|
—
|
|
|
$
|
8,210
|
|
|
$
|
—
|
|
|
$
|
90
|
|
|
$
|
83,290
|
|
Expense
|
—
|
|
|
10,479
|
|
|
10,380
|
|
|
1,058
|
|
|
210
|
|
|
2,303
|
|
|
24,430
|
|
Other
|
—
|
|
|
(387
|
)
|
|
(53
|
)
|
|
—
|
|
|
—
|
|
|
(1,211
|
)
|
|
(1,651
|
)
|
Payments
|
—
|
|
|
(12,662
|
)
|
|
(3,158
|
)
|
|
(5,257
|
)
|
|
—
|
|
|
(813
|
)
|
|
(21,890
|
)
|
November 30, 2015
|
—
|
|
|
72,420
|
|
|
7,169
|
|
|
4,011
|
|
|
210
|
|
|
369
|
|
|
84,179
|
|
Expense
|
—
|
|
|
16,178
|
|
|
7,133
|
|
|
696
|
|
|
1,058
|
|
|
1,812
|
|
|
26,877
|
|
Other
|
—
|
|
|
(3,705
|
)
|
|
(164
|
)
|
|
—
|
|
|
—
|
|
|
(1,543
|
)
|
|
(5,412
|
)
|
Payments
|
—
|
|
|
(10,771
|
)
|
|
(11,029
|
)
|
|
(1,788
|
)
|
|
(405
|
)
|
|
(522
|
)
|
|
(24,515
|
)
|
February 29, 2016
|
—
|
|
|
74,122
|
|
|
3,109
|
|
|
2,919
|
|
|
863
|
|
|
116
|
|
|
81,129
|
|
Expense
|
—
|
|
|
8,973
|
|
|
10,468
|
|
|
802
|
|
|
444
|
|
|
1,679
|
|
|
22,366
|
|
Other
|
—
|
|
|
(73
|
)
|
|
(303
|
)
|
|
—
|
|
|
(141
|
)
|
|
(1,338
|
)
|
|
(1,855
|
)
|
Payments
|
—
|
|
|
(11,597
|
)
|
|
(8,452
|
)
|
|
(1,426
|
)
|
|
(525
|
)
|
|
(298
|
)
|
|
(22,298
|
)
|
May 31, 2016
(2)
|
$
|
—
|
|
|
$
|
71,425
|
|
|
$
|
4,822
|
|
|
$
|
2,295
|
|
|
$
|
641
|
|
|
$
|
159
|
|
|
$
|
79,342
|
|
(1)
We have incurred
$461 million
of cumulative costs associated with restructuring activities initiated prior to fiscal year 2016, which include lease exit, employee separation, and other related costs of
$292 million
,
$116 million
and
$53 million
, respectively. These cumulative costs have been reflected in our segment reporting as follows:
$339 million
in University of Phoenix,
$19 million
in Apollo Global, and
$103 million
in Other.
(2)
The gross, undiscounted obligation associated with our restructuring liabilities as of
May 31, 2016
was approximately
$144 million
, which principally represents costs for non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.
Activities Initiated in Prior Years
Our restructuring activities initiated prior to fiscal year 2016 principally included closing approximately
150
University of Phoenix ground locations, rationalizing our leased administrative office facilities, and workforce reductions. During the nine months ended
May 31, 2016
, we incurred
$44.0 million
of expense for these prior year activities. The majority of the expense represents initial charges for the estimated fair value of future contractual operating lease obligations which are recorded when we cease using the respective facility, and an increase in our estimated future cash payments associated with exiting additional space at other locations included in the rationalization plan. We measure lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates which have ranged between
3%
-
7%
for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed or expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates are subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements.
As of
May 31, 2016
, we had approximately
$51 million
of remaining lease obligations associated with the locations that we expect to close as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We will incur lease obligation charges for these locations when we cease using the respective facilities. We will also continue to incur interest accretion, and may record additional adjustments in future periods for the estimated obligations associated with facilities we have already exited.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
15
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Activities Initiated in Fiscal Year 2016
During the nine months ended
May 31, 2016
, we incurred
$29.7 million
of expense for new restructuring activities initiated during fiscal year 2016. Substantially all of the expense represents severance and other employee separation costs associated with the elimination of approximately
1,400
positions. The expense associated with these activities for the nine months ended
May 31, 2016
is reflected in our segment reporting as follows:
$16.0 million
in University of Phoenix,
$1.7 million
in Apollo Global and
$12.0 million
in Other.
Note 3
.
Discontinued Operations
During the first quarter of fiscal year 2016, we completed the sale of Carnegie Learning for a nominal amount resulting in a
$2.8 million
loss on sale. We do not have significant continuing involvement with Carnegie Learning after the sale.
During fiscal year 2015, we began presenting Carnegie Learning’s assets and liabilities as held for sale on our Condensed Consolidated Balance Sheets and its operating results as discontinued operations on our Condensed Consolidated Statements of Operations for all periods presented. Carnegie Learning’s operating results were previously included in Other in our segment reporting, and certain additional Carnegie Learning expenses associated with University of Phoenix’s use of Carnegie Learning technology were included in our University of Phoenix reportable segment.
The major components of Carnegie Learning’s assets and liabilities presented separately as held for sale on our Condensed Consolidated Balance Sheets as of August 31, 2015 are as follows:
|
|
|
|
|
($ in thousands)
|
As of
August 31, 2015
|
Cash
|
$
|
10,220
|
|
Accounts receivable, net
|
10,327
|
|
Property and equipment, net
|
15,912
|
|
Intangible assets, net
|
14,100
|
|
Other
|
3,972
|
|
Allowance for reduction of assets of business held for sale
|
(13,634
|
)
|
Total assets
|
$
|
40,897
|
|
|
|
Deferred revenue
|
$
|
35,602
|
|
Other
|
5,295
|
|
Total liabilities
|
$
|
40,897
|
|
The following summarizes Carnegie Learning’s operating results for the respective periods, which are presented in
Loss from discontinued operations, net of tax
on our Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net revenue
|
$
|
—
|
|
|
$
|
5,123
|
|
|
$
|
2,993
|
|
|
$
|
13,119
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Intangibles impairment
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
12,999
|
|
Loss on sale
|
—
|
|
|
—
|
|
|
2,773
|
|
|
—
|
|
Other
|
—
|
|
|
7,756
|
|
|
4,519
|
|
|
23,469
|
|
Loss from discontinued operations before income taxes
|
—
|
|
|
(2,633
|
)
|
|
(4,299
|
)
|
|
(23,349
|
)
|
Benefit from income taxes
|
—
|
|
|
447
|
|
|
1,040
|
|
|
8,443
|
|
Loss from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
(2,186
|
)
|
|
$
|
(3,259
|
)
|
|
$
|
(14,906
|
)
|
(1)
Represents an impairment charge to write-off certain Carnegie Learning technology intangibles that were no longer being used. The associated technology had been incorporated into University of Phoenix’s academic platform and as a result of the University ceasing use of the technology, no future cash flows associated with the technology were expected over its remaining useful life. Accordingly, we recorded a
$13.0 million
impairment charge representing the remaining carrying value.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
16
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The operating results of our discontinued operations only includes revenues and costs directly attributable to the discontinued operations. Accordingly, no interest expense or general corporate overhead has been allocated to Carnegie Learning. Additionally, we ceased depreciation on Carnegie Learning’s property and equipment when we determined it was held for sale.
We determined cash flows from our discontinued operations are not material and are included with cash flows from continuing operations on our Condensed Consolidated Statements of Cash Flows.
Note 4
.
Acquisitions
Fiscal Year 2016 Acquisition
On December 10, 2015, we acquired all of the outstanding shares of Career Partner GmbH (“Career Partner”), a provider of education and training programs in Germany. This acquisition supports our strategy to diversify and expand our global operations. We made an initial cash payment of
€96 million
(equivalent to approximately
$105 million
on the acquisition date), and the acquisition includes a potential contingent consideration payment in the future of up to
€11 million
(equivalent to
$12.3 million
as of
May 31, 2016
). The contingent payment is calculated principally based on Career Partner’s operating results for calendar year 2016, and its estimated fair value on the acquisition date was
$10.7 million
, which we determined using a discounted cash flow valuation method encompassing significant unobservable inputs. The inputs include estimated operating results for the performance period and the discount rate applied. During the third quarter of fiscal year 2016, we finalized the amount of working capital acquired at closing, which resulted in a
$3.5 million
reduction in the purchase price.
We incurred approximately
$2.0 million
of transaction costs in connection with this acquisition and these costs are included in
Merger, acquisition and other related costs (credit), net
on our Condensed Consolidated Statements of Operations in the nine months ended
May 31, 2016
.
We accounted for the acquisition as a business combination and allocated the purchase price, which includes the initial cash payment, the fair value of the contingent consideration and the working capital adjustment, to the assets acquired and liabilities assumed at fair value as summarized below:
|
|
|
|
|
($ in thousands)
|
|
Cash and cash equivalents
|
$
|
4,580
|
|
Property and equipment
|
13,682
|
|
Intangibles:
|
|
Trademarks (indefinite useful life)
|
30,469
|
|
Accreditations (indefinite useful life)
|
27,948
|
|
Student and customer relationships (5 year useful life)
|
9,097
|
|
Curriculum (5 year useful life)
|
3,726
|
|
Goodwill
|
92,840
|
|
Other assets
|
2,092
|
|
Deferred revenue
|
(28,380
|
)
|
Capital lease obligations
|
(22,734
|
)
|
Other liabilities
|
(20,340
|
)
|
Total assets acquired and liabilities assumed
|
$
|
112,980
|
|
We determined the fair value of assets acquired and liabilities assumed based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value:
|
|
•
|
Intangibles
- We used income approaches to value the substantial majority of the acquired intangibles. The trademarks were valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use. The accreditations were valued using the with and with-out method, and the remaining intangibles were valued using the cost savings method or the excess earnings method.
|
|
|
•
|
Deferred revenue
- We estimated the fair value of deferred revenue using the cost build-up method, which represents the cost to deliver the services, plus a normal profit margin.
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
17
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
•
|
Capital leases
- Substantially all of the property and equipment in the above table represents capital lease assets. The fair value of the capital lease assets represents our right to use the respective assets over the remaining lease term, and the fair value of the corresponding obligations represents the future minimum lease payments discounted at a current borrowing rate.
|
|
|
•
|
Other assets and liabilities
- The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
|
We recorded
$92.8 million
of goodwill as a result of the Career Partner acquisition, which is not expected to be deductible for tax purposes. The goodwill is principally attributable to the future earnings potential associated with enrollment growth and other intangibles that do not qualify for separate recognition such as the assembled workforce. The goodwill is included in our Apollo Global reportable segment and we have selected a July 1 annual goodwill impairment test date.
We assigned an indefinite useful life to the acquired trademarks and accreditations intangibles as we believe they have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the intangibles’ useful life and we intend to renew the intangibles, as applicable, and renewal can be accomplished at little cost. We determined all other acquired intangibles are finite-lived and we are amortizing them on either a straight-line basis or using an accelerated method to reflect the pattern in which we expect the economic benefits of the assets to be consumed. The weighted average original useful life of the acquired finite-lived intangibles was
5
years. Refer to
Note 7
,
Goodwill and Intangibles
, for the estimated future amortization of our finite-lived intangibles.
Career Partner’s operating results are included in our condensed consolidated financial statements from the acquisition date. We have not provided pro forma information or the revenue and operating results of Career Partner because its results of operations are not material to our consolidated results of operations.
Fiscal Year 2015 Acquisitions
During fiscal year 2015, we completed the following acquisitions to support our strategy to diversify and expand our professional development offerings and global operations:
|
|
•
|
The Iron Yard
- On June 11, 2015, we acquired a
62%
interest in TIY Academy, LLC (“The Iron Yard”), a provider of nondegree information technology bootcamp programs in the United States, for
$15.9 million
.
|
|
|
•
|
FAEL
- On December 4, 2014, we acquired a
75%
interest in Sociedade Técnica Educacional da Lapa S.A., a provider of postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). We made an initial cash payment of
R$73.8 million
(equivalent to
$28.9 million
on the acquisition date), and the acquisition includes a potential contingent consideration payment in the future that is principally based on FAEL’s calendar year 2018 net revenue. The contingent payment has a maximum of approximately
R$34 million
(equivalent to
$9.5 million
as of
May 31, 2016
), and its fair value on the acquisition date was insignificant based on our estimate of FAEL’s future revenue in relation to the contingent payment threshold as defined in the acquisition agreement.
|
We accounted for these acquisitions as business combinations, and the operating results of The Iron Yard and FAEL are included in our consolidated financial statements from the respective acquisition dates. We have not provided pro forma information or the revenue and operating results of the acquired entities because their results of operations are not material, either individually or in the aggregate, to our consolidated results of operations in the respective periods of acquisition. The purchase price allocations are summarized below:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
The Iron Yard
|
|
FAEL
|
Tangible assets (net of acquired liabilities)
|
$
|
5,262
|
|
|
$
|
(2,807
|
)
|
Indefinite-lived intangibles
|
—
|
|
|
15,163
|
|
Finite-lived intangibles
|
4,690
|
|
|
5,394
|
|
Goodwill
|
15,888
|
|
|
14,538
|
|
Total assets acquired and liabilities assumed, net
|
25,840
|
|
|
32,288
|
|
Less: Fair value of redeemable noncontrolling interests
|
(9,900
|
)
|
|
(3,437
|
)
|
Total fair value of consideration transferred
|
15,940
|
|
|
28,851
|
|
Less: Cash acquired
|
(5,401
|
)
|
|
(7,685
|
)
|
Cash paid for acquisition, net of cash acquired
|
$
|
10,539
|
|
|
$
|
21,166
|
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
18
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5
.
Financial Instruments
We invest our excess cash in a variety of marketable securities, which are all classified as available-for-sale. The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by financial instrument category as of the respective period ends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
($ in thousands)
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and Cash
Equivalents
(1)
|
|
Current
Marketable
Securities
|
|
Noncurrent
Marketable
Securities
|
Cash
|
$
|
408,823
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
408,823
|
|
|
$
|
408,823
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
111,236
|
|
|
—
|
|
|
—
|
|
|
111,236
|
|
|
111,236
|
|
|
—
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
113,004
|
|
|
30
|
|
|
(155
|
)
|
|
112,879
|
|
|
—
|
|
|
96,531
|
|
|
16,348
|
|
Tax-exempt municipal bonds
|
104,281
|
|
|
33
|
|
|
(43
|
)
|
|
104,271
|
|
|
600
|
|
|
84,324
|
|
|
19,347
|
|
Time deposits
|
50,458
|
|
|
—
|
|
|
—
|
|
|
50,458
|
|
|
25,187
|
|
|
25,271
|
|
|
—
|
|
Other
|
40,797
|
|
|
12
|
|
|
(6
|
)
|
|
40,803
|
|
|
1,000
|
|
|
36,175
|
|
|
3,628
|
|
Total
|
$
|
828,599
|
|
|
$
|
75
|
|
|
$
|
(204
|
)
|
|
$
|
828,470
|
|
|
$
|
546,846
|
|
|
$
|
242,301
|
|
|
$
|
39,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2015
|
($ in thousands)
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and Cash
Equivalents
(1)
|
|
Current
Marketable
Securities
|
|
Noncurrent
Marketable
Securities
|
Cash
|
$
|
564,225
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
564,225
|
|
|
$
|
564,225
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
107,408
|
|
|
—
|
|
|
—
|
|
|
107,408
|
|
|
107,408
|
|
|
—
|
|
|
—
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
137,283
|
|
|
16
|
|
|
(271
|
)
|
|
137,028
|
|
|
1,823
|
|
|
82,047
|
|
|
53,158
|
|
Tax-exempt municipal bonds
|
97,022
|
|
|
68
|
|
|
(60
|
)
|
|
97,030
|
|
|
2,408
|
|
|
61,530
|
|
|
33,092
|
|
Time deposits
|
50,267
|
|
|
—
|
|
|
—
|
|
|
50,267
|
|
|
25,110
|
|
|
25,157
|
|
|
—
|
|
Other
|
36,634
|
|
|
10
|
|
|
(37
|
)
|
|
36,607
|
|
|
1,100
|
|
|
25,942
|
|
|
9,565
|
|
Total
|
$
|
992,839
|
|
|
$
|
94
|
|
|
$
|
(368
|
)
|
|
$
|
992,565
|
|
|
$
|
702,074
|
|
|
$
|
194,676
|
|
|
$
|
95,815
|
|
(1)
Cash and cash equivalents includes restricted cash and cash equivalents.
We measure our financial instruments at fair value on a recurring basis as follows:
|
|
•
|
Money market funds - We use Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.
|
|
|
•
|
Other financial instruments - We use a market approach with Level 2 observable inputs for all other securities. The Level 2 inputs include quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.
|
Our marketable securities have maturities that occur within
three years
. We may sell certain of our marketable securities prior to their stated maturities for strategic reasons including, but not limited to, investment yield and credit risk management. We have not recognized significant gains or losses related to such sales.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
19
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6
.
Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
May 31,
2016
|
|
August 31,
2015
|
Student accounts receivable
|
$
|
225,379
|
|
|
$
|
234,204
|
|
Less allowance for doubtful accounts
|
(44,871
|
)
|
|
(42,259
|
)
|
Net student accounts receivable
|
180,508
|
|
|
191,945
|
|
Other receivables
|
12,969
|
|
|
6,514
|
|
Total accounts receivable, net
|
$
|
193,477
|
|
|
$
|
198,459
|
|
Student accounts receivable is composed primarily of amounts due related to tuition and educational services. The following summarizes the activity in allowance for doubtful accounts for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Beginning allowance for doubtful accounts
|
$
|
48,125
|
|
|
$
|
49,891
|
|
|
$
|
42,259
|
|
|
$
|
50,145
|
|
Provision for uncollectible accounts receivable
|
15,716
|
|
|
13,005
|
|
|
43,812
|
|
|
42,372
|
|
Write-offs, net of recoveries
|
(19,638
|
)
|
|
(15,791
|
)
|
|
(41,376
|
)
|
|
(43,861
|
)
|
Currency translation adjustment
|
668
|
|
|
(214
|
)
|
|
176
|
|
|
(1,765
|
)
|
Ending allowance for doubtful accounts
|
$
|
44,871
|
|
|
$
|
46,891
|
|
|
$
|
44,871
|
|
|
$
|
46,891
|
|
Note 7
.
Goodwill and Intangibles
The following details changes in our goodwill by reportable segment during the nine months ended
May 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
University of
Phoenix
|
|
Apollo
Global
|
|
Other
|
|
Total
|
Goodwill as of August 31, 2015
|
$
|
71,812
|
|
|
$
|
142,599
|
|
|
$
|
32,779
|
|
|
$
|
247,190
|
|
Career Partner acquisition
|
—
|
|
|
92,840
|
|
|
—
|
|
|
92,840
|
|
Impairments
|
(71,812
|
)
|
|
—
|
|
|
(1,581
|
)
|
|
(73,393
|
)
|
Currency translation adjustment
|
—
|
|
|
(872
|
)
|
|
—
|
|
|
(872
|
)
|
Goodwill as of May 31, 2016
|
$
|
—
|
|
|
$
|
234,567
|
|
|
$
|
31,198
|
|
|
$
|
265,765
|
|
Intangibles consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
August 31, 2015
|
($ in thousands)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Effect of
Foreign
Currency
Translation
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Effect of
Foreign
Currency
Translation
|
|
Net
Carrying
Amount
|
Curriculum
(1)
|
$
|
22,238
|
|
|
$
|
(9,645
|
)
|
|
$
|
(2,349
|
)
|
|
$
|
10,244
|
|
|
$
|
19,715
|
|
|
$
|
(7,361
|
)
|
|
$
|
(2,470
|
)
|
|
$
|
9,884
|
|
Accreditations and designations
|
21,628
|
|
|
(9,648
|
)
|
|
(3,024
|
)
|
|
8,956
|
|
|
21,628
|
|
|
(6,972
|
)
|
|
(3,153
|
)
|
|
11,503
|
|
Trademarks
|
21,019
|
|
|
(4,274
|
)
|
|
(2,910
|
)
|
|
13,835
|
|
|
21,019
|
|
|
(2,942
|
)
|
|
(3,034
|
)
|
|
15,043
|
|
Student and customer relationships
(1)
|
14,534
|
|
|
(4,910
|
)
|
|
(1,864
|
)
|
|
7,760
|
|
|
5,517
|
|
|
(2,632
|
)
|
|
(1,975
|
)
|
|
910
|
|
Other
|
3,577
|
|
|
(752
|
)
|
|
(662
|
)
|
|
2,163
|
|
|
3,746
|
|
|
(597
|
)
|
|
(633
|
)
|
|
2,516
|
|
Total finite-lived intangibles
|
82,996
|
|
|
(29,229
|
)
|
|
(10,809
|
)
|
|
42,958
|
|
|
71,625
|
|
|
(20,504
|
)
|
|
(11,265
|
)
|
|
39,856
|
|
Trademarks
(1)
|
132,106
|
|
|
—
|
|
|
(14,067
|
)
|
|
118,039
|
|
|
101,637
|
|
|
—
|
|
|
(9,906
|
)
|
|
91,731
|
|
Accreditations and designations
(1)
|
42,418
|
|
|
—
|
|
|
(2,659
|
)
|
|
39,759
|
|
|
14,470
|
|
|
—
|
|
|
(2,813
|
)
|
|
11,657
|
|
Total indefinite-lived intangibles
|
174,524
|
|
|
—
|
|
|
(16,726
|
)
|
|
157,798
|
|
|
116,107
|
|
|
—
|
|
|
(12,719
|
)
|
|
103,388
|
|
Total intangible assets, net
|
$
|
257,520
|
|
|
$
|
(29,229
|
)
|
|
$
|
(27,535
|
)
|
|
$
|
200,756
|
|
|
$
|
187,732
|
|
|
$
|
(20,504
|
)
|
|
$
|
(23,984
|
)
|
|
$
|
143,244
|
|
(1)
We acquired certain intangibles during fiscal year 2016 as a result of our acquisition of Career Partner. Refer to
Note 4
,
Acquisitions
.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
20
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated future amortization expense of our finite-lived intangibles as of
May 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Remainder of 2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Total
|
Estimated future amortization expense
(1)
|
$
|
3,831
|
|
|
$
|
14,074
|
|
|
$
|
10,103
|
|
|
$
|
4,937
|
|
|
$
|
3,041
|
|
|
$
|
2,127
|
|
|
$
|
4,845
|
|
|
$
|
42,958
|
|
(1)
Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
Goodwill Impairments
Our market capitalization declined significantly during the first quarter of fiscal year 2016 after we reported our fourth quarter fiscal year 2015 results and our business outlook for fiscal year 2016. We believe the decline in the first quarter of fiscal year 2016 was attributable to University of Phoenix’s lower enrollment, increasing risk associated with the proprietary education sector, and uncertainty associated with its strategy to transform into a more focused, higher retaining and less complex institution. Additionally, initiatives associated with the University’s new strategy have accelerated the enrollment decline at the University and negatively impacted its cash flows in the short-term. Based on the decline in market capitalization, we performed an interim goodwill impairment analysis for University of Phoenix in the first quarter of fiscal year 2016.
University of Phoenix represents the substantial majority of our consolidated operating results and, as discussed above, we believe our market capitalization decline in the first quarter of fiscal year 2016 was attributable to the University. Accordingly, we estimated the fair value of our University of Phoenix reporting unit using a market-based valuation approach, which incorporated assumptions that we believe would be a reasonable market participant’s view of the increased risk and uncertainty associated with the University and its expected future cash flows. The market-based approach included multiples derived from comparable companies with consideration of the University’s current operating trends and transformational strategy in relation to the other companies. Our interim step one goodwill impairment analysis resulted in a lower estimated fair value for University of Phoenix compared to its carrying value. Based on the University’s estimated fair value and a hypothetical purchase price allocation, we determined the University had no implied goodwill. Accordingly, we recorded a
$71.8 million
impairment charge in the first quarter of fiscal year 2016 representing the University’s entire goodwill balance. We did not record an income tax benefit associated with this charge as the University’s goodwill is not deductible for tax purposes.
During the first quarter of fiscal year 2016, we also recorded a
$1.6 million
goodwill impairment charge representing the entire goodwill balance for our Western International University reporting unit. Western International University operates in the same sector of the U.S. proprietary education industry as University of Phoenix.
The majority of our other reporting units have annual goodwill impairment test dates during our fourth fiscal quarter, and we have not recorded any goodwill impairments for our other reporting units during fiscal year 2016. As part of our goodwill impairment evaluations in fiscal year 2016, we compared the sum of the estimated fair values of our reporting units to our market capitalization, plus an assumed control premium to acquire a controlling interest in Apollo. We considered the purchase price associated with our pending merger in estimating an assumed control premium. Based on our evaluation, the fair values of our reporting units were reasonable in relation to our market capitalization. However, we may be required to record additional goodwill impairment charges in the future if our critical assumptions deteriorate or our market capitalization declines further.
Note 8
.
Fair Value Measurements
We measure and disclose certain financial instruments at fair value as described in
Note 5
,
Financial Instruments
.
Liabilities measured at fair value on a recurring basis, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following as of
May 31, 2016
and
August 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Dates Using
|
|
Fair Value
as of Respective
Reporting Dates
|
|
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
($ in thousands)
|
|
|
|
Contingent consideration as of May 31, 2016
|
$
|
19,326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,326
|
|
Contingent consideration as of August 31, 2015
|
$
|
7,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,499
|
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
21
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following summarizes the changes in liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
18,200
|
|
|
$
|
6,416
|
|
|
$
|
7,499
|
|
|
$
|
41,893
|
|
Initial contingent consideration at fair value
|
—
|
|
|
—
|
|
|
10,717
|
|
|
—
|
|
Change in fair value included in net income (loss)
|
973
|
|
|
154
|
|
|
897
|
|
|
(843
|
)
|
Payment for contingent consideration
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,480
|
)
|
Currency translation adjustment
|
153
|
|
|
—
|
|
|
213
|
|
|
—
|
|
Ending balance
|
$
|
19,326
|
|
|
$
|
6,570
|
|
|
$
|
19,326
|
|
|
$
|
6,570
|
|
(1)
During fiscal year 2015,
we paid
$34.5 million
to settle the contingent consideration for our Open Colleges acquisition.
Our contingent consideration liabilities are valued using discounted cash flow valuation methods encompassing significant unobservable inputs. The inputs include estimated operating results scenarios for the applicable performance periods, probability weightings assigned to operating results scenarios and the discount rates applied. Our contingent consideration liabilities relate to the following:
|
|
•
|
Career Partner
- We acquired Career Partner during the second quarter of fiscal year 2016 and have contingent consideration of up to
€11 million
. The contingent consideration is principally based on Career Partner’s operating results for calendar year 2016 and we estimated its fair value to be $10.7 million as of the acquisition date. As of
May 31, 2016
, the estimated fair value for this contingent consideration was
$11.5 million
and the associated liability is included in accrued and other current liabilities on our Condensed Consolidated Balance Sheets.
|
|
|
•
|
Apollo Global
- As a result of our purchase of the noncontrolling interest in Apollo Global during fiscal year 2013, we have contingent consideration that is based on a portion of Apollo Global’s operating results through the fiscal years ending August 31, 2017. As of
May 31, 2016
, the estimated fair value for this contingent consideration was
$7.8 million
and the associated liability is included in other long-term liabilities on our Condensed Consolidated Balance Sheets.
|
We did not change our valuation techniques associated with recurring fair value measurements from prior periods.
Liabilities measured at fair value on a nonrecurring basis during the nine months ended
May 31, 2016
are included in other liabilities on our Condensed Consolidated Balance Sheets and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Measurement Date Using
|
|
|
($ in thousands)
|
Fair Value at
Measurement
Date
|
|
Quoted Prices in
Active Markets for
Identical Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Losses for
Nine Months Ended
May 31, 2016
|
Restructuring obligations
|
$
|
24,275
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,275
|
|
|
$
|
24,275
|
|
During the nine months ended
May 31, 2016
, we recorded
$24.3 million
of aggregate initial lease obligations at fair value associated with our restructuring activities. We recorded obligation liabilities on the dates we ceased using the respective facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to
Note 2
,
Restructuring and Impairment Charges
.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
22
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9
.
Accrued and Other Liabilities
Accrued and other current liabilities consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
May 31,
2016
|
|
August 31,
2015
|
Salaries, wages and benefits
|
$
|
57,103
|
|
|
$
|
74,454
|
|
Student discounts, grants and scholarships
|
43,644
|
|
|
44,682
|
|
Restructuring obligations
|
38,352
|
|
|
38,921
|
|
Legal and other professional obligations
|
22,009
|
|
|
23,961
|
|
Contingent consideration
|
11,500
|
|
|
—
|
|
Advertising
|
9,865
|
|
|
21,931
|
|
Deferred rent and other lease liabilities
|
9,855
|
|
|
12,181
|
|
Curriculum materials
|
7,360
|
|
|
11,690
|
|
Other
|
49,175
|
|
|
53,027
|
|
Total accrued and other current liabilities
|
$
|
248,863
|
|
|
$
|
280,847
|
|
Other long-term liabilities consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
May 31,
2016
|
|
August 31,
2015
|
Deferred rent and other lease liabilities
|
$
|
44,845
|
|
|
$
|
49,745
|
|
Restructuring obligations
|
40,990
|
|
|
44,369
|
|
Deferred revenue
|
25,230
|
|
|
16,687
|
|
Deferred gains on sale-leasebacks
|
19,075
|
|
|
20,168
|
|
Other
|
52,351
|
|
|
41,483
|
|
Total other long-term liabilities
|
$
|
182,491
|
|
|
$
|
172,452
|
|
Note 10
.
Debt
Debt and short-term borrowings consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
May 31,
2016
|
|
August 31,
2015
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
Capital lease obligations
|
30,804
|
|
|
16,863
|
|
Other
|
31,307
|
|
|
28,783
|
|
Total debt
|
62,111
|
|
|
45,646
|
|
Less short-term borrowings and current portion of long-term debt
|
(19,514
|
)
|
|
(14,080
|
)
|
Long-term debt
|
$
|
42,597
|
|
|
$
|
31,566
|
|
In fiscal year 2012, we entered into a syndicated
$625 million
unsecured revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is used for general corporate purposes, which may include acquisitions and share repurchases. The term is
five years
and will expire in April 2017. The Revolving Credit Facility may be used for borrowings in certain foreign currencies and letters of credit, in each case up to specified sublimits.
We had no outstanding borrowings under the Revolving Credit Facility as of
May 31, 2016
and
August 31, 2015
, but we had approximately
$39 million
and
$41 million
of outstanding letters of credit as of the respective periods. We also borrowed
$50 million
under the Revolving Credit Facility during the second quarter of fiscal year 2016, but subsequently repaid the amount later in the same quarter.
The Revolving Credit Facility fees are determined based on a pricing grid that varies according to our leverage ratio. The Revolving Credit Facility fee ranges from 25 to 40 basis points. Incremental fees for borrowings under the facility generally range from Prime + 25 to 85 basis points.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
23
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Revolving Credit Facility contains various customary representations, covenants and other provisions, including a material adverse event clause and the following financial covenants: maximum leverage ratio, minimum interest and rent expense coverage ratio, and U.S. Department of Education financial responsibility composite score requirements. We were in compliance with all applicable covenants related to the Revolving Credit Facility at
May 31, 2016
and
August 31, 2015
.
Other debt principally includes debt at subsidiaries of Apollo Global and other obligations. The weighted average interest rate on our outstanding other debt at
May 31, 2016
and
August 31, 2015
was
6.1%
and
5.6%
, respectively.
The carrying value of our debt, excluding capital leases, approximates fair value based on the nature of our debt, which includes consideration of the portion that is variable-rate.
Note 11
.
Income Taxes
We have historically determined our interim income tax provision by applying our estimated effective income tax rate expected to be applicable for the full fiscal year to our income before income taxes for the period. Our effective income tax rate is dependent upon several factors, such as tax rates in state and foreign jurisdictions and the relative amount of income we earn in such jurisdictions. In determining our full year estimate, we do not include the estimated impact of unusual and/or infrequent items, which may cause significant variations in the customary relationship between income tax expense and income before income taxes. We exercise significant judgment in determining our income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain.
As further discussed in
Note 7
,
Goodwill and Intangibles
, there is significant uncertainty associated with University of Phoenix’s future operating results due to competitive factors and its initiatives to transform itself into a more focused, higher retaining and less complex institution. Based primarily on this uncertainty, we used the discrete method to calculate our interim tax provision for the interim periods in fiscal year 2016. Under the discrete method, we determined our tax expense for the interim periods based on actual results as if the interim periods were an annual period, which we believe provides a more reasonable interim income tax provision than the continued use of the estimated annual effective tax rate method. Our effective income tax rate for continuing operations for the nine months ended May 31, 2016 was also significantly impacted by the goodwill impairment charge for our University of Phoenix reporting unit, which was not deductible for tax purposes.
During fiscal year 2015, the Internal Revenue Service (“IRS”) completed its review of our United States federal income tax return for fiscal year 2014. Our United States federal income tax return for fiscal year 2013 is currently open for review by the IRS and we are also participating in the IRS’s Compliance Assurance Process for fiscal years 2015 and 2016, which is a voluntary program in which taxpayers seek to resolve all or most issues with the IRS prior to or soon after filing their United States federal income tax returns. Additionally, we are subject to numerous ongoing audits by state, local and foreign tax authorities with various tax years as early as 2007 that remain subject to examination.
Although we believe our tax accruals are reasonable, the final determination of tax returns under review or returns that may be reviewed in the future and any related litigation could result in tax liabilities that materially differ from our historical income tax provisions and accruals.
Note 12
.
Shareholders’ Equity and Redeemable Noncontrolling Interests
Share Repurchases
Our Board of Directors has authorized us to repurchase outstanding shares of our Class A common stock from time to time depending on market conditions and other considerations. During fiscal year 2013, our Board of Directors authorized an increase in the amount available under our share repurchase program up to an aggregate amount of
$250 million
, of which
$52.2 million
remained available as of
May 31, 2016
. There is no expiration date on the repurchase authorizations and the amount and timing of future share repurchase authorizations and repurchases, if any, will be made as market and business conditions warrant. Repurchases occur at our discretion and may be made on the open market through various methods including but not limited to accelerated share repurchase programs, or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs. We are prohibited from repurchasing shares under the agreements associated with our pending merger, as described further in
Note 1
,
Nature of Operations and Significant Accounting Policies
.
We also repurchase shares in connection with tax withholding requirements associated with the release of vested share-based awards, which do not fall under the repurchase program described above.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
24
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following summarizes our share repurchase activity for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
(In thousands, except per share data)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Share repurchases under share repurchase program:
|
|
|
|
|
|
|
|
Number of shares repurchased
|
—
|
|
|
—
|
|
|
—
|
|
|
1,440
|
|
Weighted average purchase price per share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26.45
|
|
Cost of share repurchases
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38,092
|
|
Share repurchases related to vesting of share-based awards:
|
|
|
|
|
|
|
|
Number of shares repurchased
|
13
|
|
|
22
|
|
|
91
|
|
|
109
|
|
Cost of share repurchases
|
$
|
106
|
|
|
$
|
382
|
|
|
$
|
732
|
|
|
$
|
2,608
|
|
Share Reissuances
We reissue our Class A common stock from our treasury stock as a result of the release of shares associated with share-based awards and purchases under our employee stock purchase plan. Share reissuances were as follows for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
(In thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Number of shares reissued
|
38
|
|
|
70
|
|
|
359
|
|
|
352
|
|
Note 13
.
Earnings Per Share
Our outstanding shares consist of Apollo Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Class A and Class B common stock in an identical manner. As such, both the Class A and Class B common stock are included in the calculation of our earnings per share.
Diluted weighted average shares outstanding includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and the vesting and release of restricted stock units and performance share awards. The components of basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
(In thousands, except per share data)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Apollo (basic and diluted)
|
$
|
20,744
|
|
|
$
|
48,064
|
|
|
$
|
(100,417
|
)
|
|
$
|
48,239
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
108,658
|
|
|
107,678
|
|
|
108,567
|
|
|
108,140
|
|
Dilutive effect of restricted stock units and performance share awards
(1)
|
786
|
|
|
828
|
|
|
—
|
|
|
818
|
|
Dilutive effect of stock options
(1)
|
—
|
|
|
117
|
|
|
—
|
|
|
166
|
|
Diluted weighted average shares outstanding
|
109,444
|
|
|
108,623
|
|
|
108,567
|
|
|
109,124
|
|
Basic income (loss) per share attributable to Apollo
|
$
|
0.19
|
|
|
$
|
0.45
|
|
|
$
|
(0.92
|
)
|
|
$
|
0.45
|
|
Diluted income (loss) per share attributable to Apollo
|
$
|
0.19
|
|
|
$
|
0.44
|
|
|
$
|
(0.92
|
)
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded from diluted income (loss) per share:
|
|
|
|
|
|
|
|
Anti-dilutive restricted stock units and performance share awards
(1)
|
2,984
|
|
|
33
|
|
|
4,071
|
|
|
21
|
|
Anti-dilutive stock options
(1)
|
3,514
|
|
|
2,513
|
|
|
3,595
|
|
|
2,329
|
|
(1)
Due to the loss from continuing operations attributable to Apollo during the nine months ended May 31, 2016, no dilutive share-based awards were included in the calculation of diluted loss per share because they would have been anti-dilutive.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
25
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14
.
Share-Based Compensation
The following details share-based compensation expense for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Instructional and student advisory
|
$
|
2,432
|
|
|
$
|
2,812
|
|
|
$
|
7,856
|
|
|
$
|
8,699
|
|
Marketing
|
413
|
|
|
705
|
|
|
1,771
|
|
|
2,324
|
|
Admissions advisory
|
15
|
|
|
262
|
|
|
341
|
|
|
779
|
|
General and administrative
|
5,569
|
|
|
3,456
|
|
|
16,830
|
|
|
15,960
|
|
Restructuring and impairment charges
|
303
|
|
|
619
|
|
|
520
|
|
|
2,006
|
|
Share-based compensation expense
|
$
|
8,732
|
|
|
$
|
7,854
|
|
|
$
|
27,318
|
|
|
$
|
29,768
|
|
In accordance with our Amended and Restated 2000 Stock Incentive Plan, we granted
no
restricted stock units or performance share awards during the three months ended
May 31, 2016
and
575,000
restricted stock units and performance share awards during the nine months ended
May 31, 2016
. The granted awards had a weighted average grant date fair value per share of
$7.50
. As of
May 31, 2016
, we had
$39.5 million
and
$1.8 million
of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested restricted stock units and performance share awards, respectively. This expense is expected to be recognized over a weighted average period of
2.2 years
.
In accordance with our Amended and Restated 2000 Stock Incentive Plan, we granted
no
stock options during the three months ended
May 31, 2016
and
4,000
stock options during the nine months ended
May 31, 2016
. The weighted average grant date fair value and the weighted average exercise price of the options granted were
$4.12
and
$10.35
, respectively. As of
May 31, 2016
, we had
$6.8 million
of unrecognized share-based compensation expense, net of estimated forfeitures, related to unvested stock options. This expense is expected to be recognized over a weighted average period of
2.3 years
.
Note 15
.
Commitments and Contingencies
Surety Bonds
Our insurers issue surety bonds for us that are required by various states where we operate, or that are required for other purposes. We are obligated to reimburse our insurers for any surety bonds that are paid. As of
May 31, 2016
, the face amount of these surety bonds was approximately
$24 million
.
Letters of Credit
As of
May 31, 2016
, we had approximately
$39 million
of outstanding letters of credit, which support certain of our obligations and guarantees provided by our subsidiaries as part of our normal operations for which fair value is not material.
Litigation and Other Matters
We are subject to various claims and contingencies that arise from time to time in the ordinary course of business, including those related to regulation, litigation, business transactions, employee-related matters and taxes, among others. We do not believe any of these are material for separate disclosure.
The following is a description of pending litigation, settlements, and other proceedings that fall outside the scope of ordinary and routine litigation incidental to our business.
Merger-Related Shareholder Suits
In connection with the pending merger described in
Note 1
,
Nature of Operations and Significant Accounting Policies
, the class action lawsuits listed below have been filed in the Superior Court of the State of Arizona, Maricopa County against some or all of the following parties: us, our directors, the Apollo Class B Voting Stock Trust No. 1, AP VIII Queso Holdings, L.P., Socrates Merger Sub, Inc., and Barclays Capital Inc. and Evercore Group L.L.C. (in their capacity as our financial advisors in connection with the merger):
|
|
•
|
Casey
v.
Apollo Education Group, Inc., et al.
, Case No. CV2016-051605 filed on February 25, 2016;
|
|
|
•
|
Miglio
v.
Apollo Education Group, Inc.
,
et al.
, Case No. CV2016-003718 filed on February 26, 2016;
|
|
|
•
|
Blanchfield
v.
Apollo Education Group, Inc.
,
et al
., Case No. CV2016-001738 filed on February 29, 2016;
|
|
|
•
|
Wagner
v.
Apollo Education Group, Inc.
,
et al.
, Case No. CV2016-001905 filed on March 9, 2016;
|
|
|
•
|
Ladouceur
v.
Apollo Education Group, Inc.
,
et al.
, Case No. CV2016-002148 filed on March 17, 2016; and
|
|
|
•
|
Simkhovich
v.
Apollo Education Group, Inc.
,
et al.
, Case No. CV2016-002339 filed on March 23, 2016.
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
26
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The complaints generally allege that our directors have violated their fiduciary duties by, among other things, failing to properly value us and failing to maximize our value to our shareholders as well as by including purportedly preclusive deal protections in the merger agreement, and that we, AP VIII Queso Holdings, L.P. and Socrates Merger Sub, Inc. aided and abetted such alleged breaches of fiduciary duties. The
Miglio
,
Wagner
,
Ladouceur
and
Simkhovich
complaints further allege that our directors breached their fiduciary duty of candor by filing a materially incomplete and misleading preliminary proxy statement and also allege that the sale process was negatively impacted by certain conflicts with our financial advisors. The plaintiffs seek various remedies, including a declaration that the action is properly maintainable as a class action, an injunction against the consummation of the merger, an accounting of the damages sustained by the plaintiffs and the class, costs and fees of the action, including attorneys’ fees and expenses, and any other equitable relief the court may deem just and proper.
On March 4, 2016, the action titled
Blanchfield
v.
Apollo Education Group, Inc.
,
et al
. was voluntarily dismissed without prejudice.
On April 12, 2016, the Superior Court of the State of Arizona, Maricopa County consolidated the remaining
Casey
,
Miglio
,
Wagner
,
Ladouceur
and
Simkhovich
cases into a single action,
In re Apollo Education Group, Inc. Shareholder Litigation
, Lead Case No. CV2016-001905 (the “Consolidated Action”). On May 1, 2016, we reached an agreement with the plaintiffs to settle the Consolidated Action in connection with the increase in the merger consideration per share, which agreement is subject to consummation of the merger, certain confirmatory discovery and approval by the court. If the merger is consummated, we anticipate that we will be required to pay the plaintiffs’ expenses and an amount for attorneys’ fees yet to be determined and subject to court approval.
Securities Class Action (Rameses Te Lomingkit et. al.)
On March 14, 2016, a class action complaint was filed in the United States District Court for the District of Arizona, captioned
Rameses Te Lomingkit et. al. v. Apollo Education Group, Inc. et. al.
, Case Number 2:16-CV-00689-JZB. The plaintiff, who allegedly purchased our shares during the specified class period, filed this putative class action on behalf of the plaintiff and all of our shareholders who acquired Class A shares between June 26, 2013 and October 21, 2015 and seeks certification as a class action and unspecified compensatory damages and costs. The plaintiff alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated under the Exchange Act, by us and certain of our officers for making allegedly false and misleading statements and failing to disclose material facts relating to the nature of our military recruitment activities and the status of our online classroom platform. The Court appointed the Government of Guam Retirement Fund as lead plaintiff on June 16, 2016. The lead plaintiff has until August 15, 2016 to file a consolidated or amended complaint, or to designate the previously filed complaint as the operative complaint.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Class Action under the Telephone Consumer Protection Act
On June 24, 2016, Twonesha Johnson-Hendricks filed a class action complaint,
Johnson-Hendricks v. University of Phoenix
, 2:16-cv-01434 (E.D. Cal.) in the United States District Court for the Eastern District of California, alleging that University of Phoenix violated the Telephone Consumer Protection Act by contacting class members without their consent. We are evaluating the complaint, which seeks to recover damages on behalf of plaintiff and other members of the putative class.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Shareholder Demand Letter
On June 10, 2016, we received a shareholder demand to commence a civil action against each of our directors and certain of our current and former officers on grounds of breach of fiduciary duty and other claims, and to make available for examination certain records. The demand is a condition precedent under applicable Arizona law to the filing of a derivative lawsuit on behalf of the Company seeking damages from directors and officers for breach of fiduciary duty. We are evaluating the demand.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Class Action Alleging Violations of Kentucky Wage and Hour Laws
On June 9, 2015, two former University of Phoenix employees filed an action in the Circuit Court of Jefferson County Kentucky alleging that they were wrongfully terminated from their positions with the University in violation of Kentucky and federal law. In
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
27
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
this action, which is captioned
Aldrich et al. v. The University of Phoenix,
15-C-2839 (Jefferson Cty. Circuit Court), plaintiffs also allege that the University violated Kentucky wage and hour law by failing to pay plaintiffs overtime and other required wages, and in connection with these wage and hour claims, they seek to represent a class of plaintiffs consisting of all individuals employed by the University within the past five years who performed a substantial part of their job duties in Kentucky. Plaintiffs seek to recover damages on their own behalf in connection with their alleged wrongful termination and past due wages, overtime compensation and other relief on behalf of the class in connection with the wage and hour claims. On March 4, 2016, the Court granted our motion to dismiss and compel arbitration. On March 9, 2016, plaintiffs filed a notice of their intent to appeal with the U.S. Court of Appeals for the Sixth Circuit. The appeal is currently pending.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Incentive Compensation False Claims Act Lawsuit
On May 25, 2011, we were notified that a
qui tam
complaint had been filed against us in the U.S. District Court, Eastern District of California, by private relators under the Federal False Claims Act and California False Claims Act, entitled
USA and State of California ex rel. Hoggett and Good v. University of Phoenix, et al
, Case Number 2:10-CV-02478-MCE-KJN. When the federal government declines to intervene in a qui tam action, as it has done in this case, the relators may elect to pursue the litigation on behalf of the federal government and, if successful, they are entitled to receive a portion of the federal government’s recovery.
The complaint alleges, among other things, that University of Phoenix has violated the Federal False Claims Act since December 12, 2009 and the California False Claims Act for the preceding ten years by falsely certifying to the U.S. Department of Education and the State of California that University of Phoenix was in compliance with various regulations that require compliance with federal rules regarding the payment of incentive compensation to admissions personnel, in connection with University of Phoenix’s participation in student financial aid programs. In addition to injunctive relief and fines, the relators seek significant damages on behalf of the Department of Education and the State of California, including all student financial aid disbursed by the Department to our students since December 2009 and by the State of California to our students during the preceding ten years. On July 24, 2014, the Court granted our motion to dismiss for lack of jurisdiction and dismissed relators’ complaint with prejudice. On December 14, 2014, relators filed a Notice of Appeal with the U.S. Court of Appeals for the Ninth Circuit, and their appeal remains pending before that court.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Federal False Claims Act Lawsuit
On March 3, 2016, a
qui tam
complaint against us filed by a private relator under the Federal False Claims Act was unsealed. The lawsuit, captioned
United States of America ex rel. Arthur Green v. University of Phoenix, et al
, Case Number 1:14 CV 1654, was previously filed under seal in the U.S. District Court for the Northern District of Ohio. It was unsealed by order of the District Court after the federal government notified the District Court of its decision not to intervene in the case.
The complaint alleges, among other things, that since at least July 2008, University of Phoenix has violated the Federal False Claims Act by falsely certifying to the U.S. Department of Education that the University was in compliance with various regulations under the U.S. Higher Education Act relating to preparation of student financial aid forms and other matters, including in connection with employee participation in student financial aid programs. The relator seeks unspecified damages on behalf of the federal government. On June 2, 2016, the District Court granted the motion of the relator’s counsel to withdraw, and the relator had until July 5, 2016 to either obtain new counsel or otherwise show cause why the case should not be dismissed for want of prosecution. In response to the Court’s order, the relator has filed a motion seeking an extension of time to identify new counsel.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
K.K. Modi Investment and Financial Services Pvt. Ltd.
On November 8, 2010, a suit was filed by K.K. Modi Investment and Financial Services Pvt. Ltd. (“Modi”) in the High Court of Delhi at New Delhi against defendants Apollo, Western International University, Inc., University of Phoenix, Inc., Apollo Global, Inc., Modi Apollo International Group Pvt. Ltd., Apollo International, Inc., John G. Sperling, Peter V. Sperling and Jorge Klor De Alva, seeking to permanently enjoin the defendants from making investments in the education industry in the Indian market in breach of an exclusivity and noncompete provision which plaintiff alleges is applicable to Apollo and its subsidiaries. The case is
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
28
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
entitled,
K.K. Modi Investment and Financial Services Pvt. Ltd. v. Apollo International, et. al
. We believe that the relevant exclusivity and noncompete provision is inapplicable to us and our affiliates. On October 31, 2014, the Court denied the Apollo defendants’ initial applications to have the case dismissed, concluding that plaintiffs’ complaint raised factual issues that needed to be resolved through the submission of evidence. Defendants appealed that ruling to the Division Bench of the High Court, and that appeal was denied by the Division Bench on August 17, 2015. We then filed a Special Leave Petition before the India Supreme Court on November 21, 2015 seeking leave to appeal the decision of the Division Bench, which was denied on January 15, 2016. On February 15, 2016, we filed a petition for review of the denial of the Special Leave Petition, which was rejected by the India Supreme Court on March 31, 2016. The case will be returned to the Delhi High Court for the taking of evidence. If plaintiff ultimately obtains the requested injunctive relief, our ability to conduct business in India, including through our joint venture with HT Media Limited, may be adversely affected. It is also possible that in the future K.K. Modi may seek to expand existing litigation in India or commence litigation in the U.S. in which it may assert a significant damage claim against us.
Because of the many questions of fact and law that may arise, the outcome of this legal proceeding is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this action and, accordingly, we have not accrued any liability associated with this action.
Attorney General Investigations
In August 2015, we received an Investigative Subpoena from the Office of the Attorney General of the State of California. The Subpoena requires us to produce documents and information regarding the business and practices of University of Phoenix relating to members and former members of the U.S. military and California National Guard, including marketing, recruiting, billing, financial aid, accommodation and other services for military personnel, compliance with federal Executive Order 13607 (Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members), and use of U.S. military logos and emblems in marketing, for the time period of July 1, 2010 to the present.
In February 2016, we received a Second Investigative Subpoena from the Office of the Attorney General of the State of California in the Matter of the Investigation of For-Profit Educational Institutions, following the Investigative Subpoena we received in August 2015. The Second Investigative Subpoena, which is not limited to matters involving military students, seeks the production of documents and information regarding a broad spectrum of the business and practices of Apollo and its subsidiaries, including University of Phoenix, relating to marketing, recruiting, compensation of enrollment advisors, complaints, financial aid, compliance, accreditation, other governmental investigations, private litigation and other matters, as well as additional information relating to marketing and services to members and former members of the U.S. military and California National Guard, for the time period of July 1, 2010 to the present.
We are cooperating with the California Attorney General in these investigative proceedings. We cannot predict the eventual scope, duration or outcome of the investigations at this time.
In May 2011 and January 2013, University of Phoenix received Civil Investigative Demands from the State of Massachusetts Office of the Attorney General. The Demands relate to an investigation of possible unfair or deceptive methods, acts, or practices by proprietary educational institutions in connection with the recruitment of students and the financing of education. The Demands seek documents, information and testimony regarding a broad spectrum of the University’s business for the time period of January 1, 2002 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
In October 2010, University of Phoenix received notice that the State of Florida Office of the Attorney General in Fort Lauderdale, Florida had commenced an investigation into possible unfair and deceptive trade practices associated with certain alleged practices of the University. The notice included a subpoena to produce documents and detailed information for the time period of January 1, 2006 to the present about a broad spectrum of the University’s business. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
Because of the many questions of fact and law that may arise, the outcome of these state Attorneys General investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
In addition, from time to time, we receive requests for information from state Attorneys General, accrediting bodies, state higher education regulatory bodies and other federal and state government agencies relating to investigations or inquiries being conducted by other state or federal agencies, pending litigation or specific complaints received from students or former students. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our practices. We received such a request from the Wisconsin Department of Justice for information relating to programs offered by University of Phoenix to Wisconsin residents. On May 2, 2016, we accepted service of a Wisconsin
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
29
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Department of Justice subpoena in order to allow the University to lawfully produce student records to the Wisconsin Department of Justice, subject to certain notice requirements, in connection with this inquiry.
Federal Trade Commission Investigation
In July 2015, we received a Civil Investigative Demand from the U.S. Federal Trade Commission (the “FTC”) relating to an investigation to determine if certain unnamed persons, partnerships, corporations, or others have engaged or are engaging in deceptive or unfair acts or practices in or affecting commerce in the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services. The Demand requires us to produce documents and information regarding a broad spectrum of the business and practices of University of Phoenix, including in respect of marketing, recruiting, enrollment, financial aid, tuition and fees, academic programs, academic advising, student retention, billing and debt collection, complaints, accreditation, training, military recruitment, and other compliance matters, for the time period of January 1, 2011 to the present. We are cooperating with the investigation. We cannot predict the eventual scope, duration or outcome of the investigation at this time.
Because of the many questions of fact and law that may arise, the outcome of the FTC investigation is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for this matter and, accordingly, we have not accrued any liability associated with this matter.
Open Colleges Investigations
In September 2015, Open Colleges received a Notice from the Australian Competition and Consumer Commission (“ACCC”) requiring Open Colleges to produce information about student refunds upon withdrawal and related matters for the period of time since July 2014. In addition, Open Colleges receives inquiries and is subject to audits from time to time from governmental regulatory authorities, including an inquiry in October 2015 from the Australian Skills Quality Authority regarding student complaints about marketing practices, refund policies and other matters (since concluded without material findings), and a notice from the Australian Skills Quality Authority in June 2016 of a compliance audit. Open Colleges is cooperating with the relevant authorities in these matters, but we cannot at this time predict their eventual scope, duration or outcome.
Because of the many questions of fact and law that may arise, the outcome of these investigative proceedings is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss for these matters and, accordingly, we have not accrued any liability associated with these matters.
Office of the Inspector General of the U.S. Department of Education (“OIG”) Subpoena
On March 21, 2014, University of Phoenix received a subpoena from the Mid-Atlantic Region of the OIG. The subpoena seeks the production by the University of documents and detailed information regarding a broad spectrum of the activities conducted in the University’s Centralized Service Center for the Northeast Region located in Columbia, Maryland, for the time period of January 1, 2007 to the present, including information relating to marketing, recruitment, enrollment, financial aid processing, fraud prevention, student retention, personnel training, attendance, academic grading and other matters. We are cooperating with these requests, but we cannot at this time predict the eventual scope, duration or outcome of this matter.
Because of the many questions of fact and law that may arise, the outcome of this matter is uncertain at this point. Based on the information available to us at present, we cannot reasonably estimate a range of loss and, accordingly, we have not accrued any liability associated with this matter.
UNIACC Investigations
UNIACC was advised by the National Accreditation Commission of Chile in November 2011 that its institutional accreditation would not be renewed and therefore had lapsed. Subsequently, in June 2012, a prosecutor’s office in Santiago, Chile requested that UNIACC provide documents relating to UNIACC’s relationship with a former employee and consultant who served as a member of the National Accreditation Commission (“CNA”) until March 2012, and we received requests for additional information in connection with this investigation. Furthermore, in August 2012, the prosecutor’s office began requesting that UNIACC provide information about UNIACC’s business structure and operations and its relationship with other Apollo entities, in connection with an additional investigation regarding UNIACC’s compliance with applicable laws concerning the generation of profit by universities such as UNIACC. The prosecutor’s office also requested additional information from UNIACC regarding certain government funding received by the institution. On April 7, 2016, the prosecutor closed the investigation related to the CNA matter.
Securities Class Action (Teamsters Local 617 Pension and Welfare Funds)
On November 2, 2006, the Teamsters Local 617 Pension and Welfare Funds filed a class action complaint alleging that we and certain of our current and former directors and officers violated the Securities Exchange Act of 1934. The complaint is entitled
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
30
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Teamsters Local 617 Pension & Welfare Funds v. Apollo Group, Inc. et al.
, Case Number 06-cv-02674-RCB.
The parties reached an agreement in principle to settle this matter for an immaterial amount and, on July 29, 2015, the district court entered an order approving the settlement and dismissing with prejudice the claims against defendants. Subsequent to the approval, an individual non-class member filed an untimely objection to the settlement with the district court. On December 7, 2015, the district court struck the objection.
Note 16
.
Regulatory Matters
All U.S. federal student financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. The most recent reauthorization of the Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in discussion and activity regarding Higher Education Act reauthorization, but the timing and terms of any eventual reauthorization cannot be predicted.
The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification, which is granted in a Program Participation Agreement with the institution.
University of Phoenix’s Title IV Program Participation Agreement expired on December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the continued challenging political and regulatory climate and other recent developments in general relating to the proprietary education sector and our business may have on the timing or outcome of the recertification process.
In February 2016, the Department notified the University that for the duration of the month-to-month continuation of the University’s Program Participation Agreement, University of Phoenix must obtain from the Department prior approval of substantial changes, including (i) the establishment of additional locations, (ii) any increase in the level of academic offering beyond those listed in the Institution’s Eligibility and Certification Approval Report and (iii) the addition of any educational program (including degree, nondegree, or short-term training programs). Some of these substantial changes include changes that previously could be implemented by the University upon notice to the Department and without prior approval.
Additionally, in August 2014, the Department commenced an ordinary course program review of University of Phoenix’s administration of Title IV programs covering federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, the Drug-Free Schools and Communities Act and related regulations. During fiscal year 2015, the University received a Final Program Review Determination Letter with regard to this program review. All administrative matters are deemed by the Department to be resolved and/or closed, with the exception of findings regarding compliance with the Clery Act, which have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters. The outcome of this matter is uncertain at this point and, based on the information available to us at present, we have not accrued any liability associated with this matter.
Financial Responsibility Composite Score
To participate in Title IV programs, the U.S. Department of Education regulations specify that an eligible institution of higher education must satisfy specific measures of financial responsibility prescribed by the Department, or post a letter of credit in favor of the Department and accept other conditions on its participation in Title IV programs. Pursuant to the Title IV program regulations, each eligible institution must satisfy a measure of financial responsibility that is based on a weighted average of the following three annual ratios which assess the financial condition of the institution:
|
|
•
|
Primary Reserve Ratio - measure of an institution’s financial viability and liquidity;
|
|
|
•
|
Equity Ratio - measure of an institution’s capital resources and its ability to borrow; and
|
|
|
•
|
Net Income Ratio - measure of an institution’s profitability.
|
These ratios provide three individual scores which are converted into a single composite score. The maximum composite score is
3.0
. If an institution’s composite score is at least
1.5
, it is considered financially responsible. If an institution’s composite score is less than 1.5 but is
1.0
or higher, it is still considered financially responsible, and the institution may continue to participate as a financially responsible institution for up to
three
years under the Department’s “zone” alternative. Under the
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
31
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
zone alternative, the Department may subject the institution to various operating or other requirements, which may include being transferred from the “advance” method of payment of Title IV program funds to the heightened cash monitoring payment method under which the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds from the Department for the amount of those disbursements, or being transferred to the more onerous reimbursement payment method under which an institution must submit to the Department documentation demonstrating the eligibility for each Title IV disbursement and wait for the Department’s approval before drawing down Title IV funds.
If an institution does not achieve a composite score of at least 1.0, it is subject to additional requirements in order to continue its participation in the Title IV programs, including submitting to the Department a letter of credit in an amount equal to at least
ten
percent, and at the Department’s discretion up to
50%
, of the Title IV funds received by the institution during its most recently completed fiscal year, and being placed on provisional certification status, under which the institution must receive Department approval before implementing new locations or educational programs and comply with other restrictions, including reduced due process rights in subsequent proceedings before the Department.
In addition, under new regulations that took effect on July 1, 2016, institutions placed on either the heightened cash monitoring payment method or the reimbursement payment method must pay Title IV credit balances to students and parents before requesting Title IV funds from the Department and may not hold Title IV credit balances on behalf of students or parents, even if such balances are expected to be applied to future tuition payments.
The composite scores for Apollo Education Group and University of Phoenix, which are calculated as of the end of our fiscal year, were as follows for the indicated periods:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2015
|
|
2014
|
|
2013
|
Apollo Education Group
|
2.6
|
|
2.5
|
|
2.6
|
University of Phoenix
|
2.9
|
|
2.3
|
|
2.5
|
As discussed in
Note 7
,
Goodwill and Intangibles
, we recorded
$73.4 million
of goodwill impairment charges relating to our University of Phoenix and Western International University reporting units during the first quarter of fiscal year 2016, which was primarily the result of a substantial decline in our market capitalization. These impairment charges increase our fiscal year 2016 total operating expenses, which will negatively impact our fiscal year 2016 composite scores to be calculated as of August 31, 2016. If our profitability declines further than expected, including as a result of additional goodwill impairment charges, which could result from further declines in our market capitalization, higher than expected restructuring charges, our inability to execute on our currently planned cost reduction initiatives, a more than anticipated decline in enrollment, or other unexpected changes or developments, our fiscal year 2016 composite scores could fall below 1.5.
We believe that we may be able to take certain corrective measures to maintain composite scores of 1.5 or greater, if we determine that there is increased risk that our fiscal year 2016 composite scores will fall below that level, depending on the circumstances causing the expected decline. However, such measures, if available, may require material modifications to our business and strategy that would adversely impact our future revenue and profitability and/or may involve the issuance of equity or equity-linked securities under challenging circumstances that could result in material dilution to our existing shareholders.
If our composite score falls below 1.5, our liquidity could be subject to severe stress due to the following factors:
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|
•
|
Our principal revolving credit facility, which expires in April 2017, requires that we maintain a composite score of at least 1.5. If our composite score falls below 1.5, it would be an event of default under the facility and any outstanding balance could be declared immediately due and payable.
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•
|
Although not required solely due to participation in the zone alternative discussed above, we could be required by the Department of Education to submit a letter of credit in an amount of 10% or more of our annual Title IV receipts as a result of factors related to the cause of our composite score decline, which letter of credit likely would need to be cash collateralized and our revolving credit facility would not be available for this purpose.
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•
|
If the Department places University of Phoenix on the heightened cash monitoring payment method, we would need to deploy additional working capital to conduct our business due to the delay in receipt of Title IV funding. If University of Phoenix is placed on the reimbursement payment method, our working capital needs would increase significantly, the precise amount of which increase cannot be predicted because it would depend on the average length of time required by the Department to evaluate and approve our requests for reimbursement and the amount of any required letter of credit.
|
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
32
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The combined effect of the above factors could cause our business to no longer be sustainable without a significant infusion of equity or other funding. Under current market conditions, there is no assurance that other funding sources would be available in sufficient amounts on terms acceptable to us or at all, and any available equity funding would necessarily involve substantial dilution to our current shareholders.
Gainful Employment
Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.
In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt service-to-earnings ratios. The two tests specify minimum debt service-to-earnings ratios calculated on the basis of the average earnings of program graduates; one test measures student loan debt service as a percentage of total earnings, and the other test measures student loan debt service as a percentage of discretionary earnings. If a program fails to meet either minimum ratio for one year, the institution will be required to provide a warning notice to prospective and enrolled students advising that the program may lose Title IV eligibility based on the final student debt service-to-earnings ratios for the next award year. Programs that fail to meet either of the minimum ratios for two out of three consecutive years will immediately cease to be Title IV eligible for a period of at least three years.
The Department has indicated that the official 2014 gainful employment debt service-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios has not yet been announced. We believe it is likely that some of University of Phoenix’s programs will be impacted by the regulations. However, the University ceased enrolling new students in many of the programs it believes may be impacted in connection with its initiatives to transform itself into a more focused, higher retaining and less complex institution. As of August 31, 2015, students in these programs that ceased enrolling new students represented approximately
10%
of the University’s Degreed Enrollment. Students who were already enrolled in such programs, and who do not elect to enroll in a different University of Phoenix program, will be taught-out in due course.
Changes in student borrowing needs and practices, student loan interest rates, labor markets and other factors outside of our control could adversely impact compliance with these regulations for some of our programs in the future. The Department has not yet announced the protocol for calculating and disseminating the debt service-to-earnings ratios. Because the ratios will be issued by the Department after the measuring period, we may not know of a program’s failure to meet the tests until well after the measuring period, and students enrolled in such a program could lose their access to federal financial aid before completing the program.
Higher Learning Commission Accreditation
University of Phoenix is regionally accredited by The Higher Learning Commission (“HLC”), which provides the following:
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•
|
Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;
|
|
|
•
|
Qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and
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•
|
Qualification for authority to operate in certain states.
|
In July 2013, the accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. The University is subject to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2017 and will undergo its next reaffirmation process in 2022-2023.
Military Benefit Programs
U.S. Department of Defense Tuition Assistance Program
On January 15, 2016, University of Phoenix was notified by the U.S. Department of Defense (“DoD”) that the University’s probationary status in respect of its participation in the DoD Tuition Assistance Program for active duty military personnel had been lifted, effective immediately. The University had been placed on probation in October 2015 pending a review by the
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
33
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Department of the University’s compliance with the DoD Voluntary Education Partnership Memorandum of Understanding with the University, which is the basis on which the University’s active duty military students participate in the DoD Tuition Assistance Program.
The University will be subject to a heightened compliance review for a period of one-year following the removal of probationary status. During this period, the University will continue to engage with the Department and complete the production of information and documents previously requested by the Department. In addition, the University will be subject to an enhanced compliance review in fiscal year 2017.
In fiscal year
2015
, funding under the DoD Tuition Assistance Program represented less than
1%
of the University’s net revenue.
U.S. Department of Veterans Affairs Educational Benefits
University of Phoenix participates in the Department of Veterans Affairs educational benefits programs (“VA Programs”) for eligible veterans. Under these VA Programs, the educational locations serving veterans are subject to a compliance survey each year. Following the notice of probation in October 2015 from the Department of Defense, which has been subsequently lifted as described above, the Veterans Administration announced the commencement of the annual compliance survey, with an accelerated schedule and increased scope relative to prior years. The annual compliance review was completed with no adverse action imposed on the University. In fiscal year 2015, funding under VA Programs represented approximately
10%
of University of Phoenix’s cash basis revenue, calculated on the same basis as for the 90/10 Rule.
Note 17
.
Segment Reporting
We operate in the education industry and our operating segments have been determined based on the method by which our chief operating decision maker evaluates performance and allocates resources. We have not aggregated any of our operating segments, which are presented in our segment reporting as follows:
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•
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University of Phoenix
, which offers undergraduate and graduate degrees through its
nine
colleges in a wide range of program areas as well as various nondegree programs. A
significant majority
of the University’s students attend classes exclusively online, and the University also offers its educational programs and services at ground locations throughout the United States.
|
|
|
•
|
Apollo Global
, which includes our institutions based outside the U.S., and its corporate operations. Apollo Global acquired Career Partner and FAEL during the second quarter of fiscal year 2016 and 2015, respectively. Refer to
Note 4
,
Acquisitions
. The operating results of these entities are included in our Apollo Global operating segment from the date of each respective acquisition.
|
|
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•
|
Other
,
which includes College for Financial Planning,
Western International University, Apollo Professional Development, and Apollo corporate activities. Apollo acquired The Iron Yard during the fourth quarter of fiscal year 2015, and its operating results are included in Other in our segment reporting from the acquisition date.
|
During the fourth quarter of fiscal year 2015, we classified Carnegie Learning as held for sale and began presenting it as discontinued operations. Carnegie Learning’s operating results were previously included in Other in our segment reporting, and certain additional Carnegie Learning expenses associated with University of Phoenix’s use of Carnegie Learning technology were included in our University of Phoenix reportable segment. As Carnegie Learning’s operating results are presented as discontinued operations on our Condensed Consolidated Statements of Operations for all periods presented, we have revised our segment reporting to exclude Carnegie Learning’s operating results.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
34
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of financial information by reportable segment is as follows:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
May 31,
|
|
Nine Months Ended
May 31,
|
($ in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
University of Phoenix
|
$
|
424,479
|
|
|
$
|
560,692
|
|
|
$
|
1,252,052
|
|
|
$
|
1,641,314
|
|
Apollo Global
|
125,007
|
|
|
109,622
|
|
|
334,135
|
|
|
305,862
|
|
Other
|
8,516
|
|
|
6,044
|
|
|
23,184
|
|
|
18,810
|
|
Net revenue
|
$
|
558,002
|
|
|
$
|
676,358
|
|
|
$
|
1,609,371
|
|
|
$
|
1,965,986
|
|
Operating income (loss)
(1)
:
|
|
|
|
|
|
|
|
|
University of Phoenix
|
$
|
59,681
|
|
|
$
|
103,395
|
|
|
$
|
33,099
|
|
|
$
|
216,776
|
|
Apollo Global
(2)
|
(459
|
)
|
|
5,465
|
|
|
(29,677
|
)
|
|
(26,918
|
)
|
Other
(3)
|
(27,223
|
)
|
|
(15,576
|
)
|
|
(97,488
|
)
|
|
(69,879
|
)
|
Operating income (loss)
|
31,999
|
|
|
93,284
|
|
|
(94,066
|
)
|
|
119,979
|
|
Reconciling items:
|
|
|
|
|
|
|
|
Interest income
|
1,041
|
|
|
762
|
|
|
2,883
|
|
|
2,091
|
|
Interest expense
|
(1,569
|
)
|
|
(1,715
|
)
|
|
(4,997
|
)
|
|
(5,116
|
)
|
Other loss, net
|
(273
|
)
|
|
(2,038
|
)
|
|
(2,229
|
)
|
|
(4,480
|
)
|
Income (loss) from continuing operations before income taxes
|
$
|
31,198
|
|
|
$
|
90,293
|
|
|
$
|
(98,409
|
)
|
|
$
|
112,474
|
|
(1)
University of Phoenix, Apollo Global and Other include restructuring and impairment charges during the periods, which includes a
$71.8 million
goodwill impairment charge during the first quarter of fiscal year 2016 for our University of Phoenix reporting unit. Refer to
Note 2
,
Restructuring and Impairment Charges
, and
Note 7
,
Goodwill and Intangibles
.
(2)
During the three and nine months ended
May 31, 2016
, Apollo Global had
$0.6 million
and
$3.8 million
of expense included in
Merger, acquisition and other related costs (credit), net
, respectively. During the three and nine months ended
May 31, 2015
, Apollo Global had a net credit of
$1.0 million
and
$1.7 million
of net expense, respectively.
(3)
During the three and nine months ended
May 31, 2016
, Other had
$7.7 million
and
$21.4 million
of expense included in
Merger, acquisition and other related costs (credit), net
, respectively, and
$0.5 million
and
$2.8 million
during the three and nine months ended
May 31, 2015
, respectively.
Our consolidated assets by reportable segment consist of the following as of the respective period ends:
|
|
|
|
|
|
|
|
|
($ in thousands)
|
May 31,
2016
|
|
August 31,
2015
|
University of Phoenix
|
$
|
596,440
|
|
|
$
|
648,755
|
|
Apollo Global
|
714,248
|
|
|
588,434
|
|
Other
(1)
|
726,938
|
|
|
963,875
|
|
Total assets
|
$
|
2,037,626
|
|
|
$
|
2,201,064
|
|
(1)
The majority of the assets included in Other consists of cash and cash equivalents and marketable securities.
Apollo Education Group, Inc. | Third Quarter 2016 Form 10-Q |
35