2nd UPDATE:Apollo Group Profit Up; Revenue Policy Questioned Anew

Apollo Group Inc.'s (APOL) policy for returning funds after students withdraw is again being scrutinized, this time by the U.S. Department of Education.

Apollo executives said Thursday its University of Phoenix received notice from the Education Department regarding the school's program policies under Title IV, the code that qualifies schools to receive federal financial aid. The company expects its liability from the findings - which were uncovered when the school was up for reaccreditation - will be about $1.5 million. In addition, Apollo expects it will need to post a $125 million letter of credit by Jan. 30 to comply with regulations governing the untimely return of unearned Title IV funds.

"We're reviewing the report in detail and expect to submit a response within the 90 day time frame as required," Chief Executive Charles B. Edelstein said in a conference call.

The firm's shares were down 5% to $60.75 in after-hours trading. The stock is down nearly 20% the past year, taking a big hit in late October when it disclosed an SEC probe of its revenue recognition practices. The company had no further comment on the SEC investigation.

In this most recent inquiry, Apollo said the Department of Education found errors related to when a student has officially withdrawn from school and therefore when the school must return financial aid funds to the government. The department didn't, however, find errors in the school's calculations of what funds it needed to return.

The department also found errors in self-reported calculations of student financial needs, as well as a concern over students enrolling in and starting classes without understanding their eligibility for financial aid.

The company said it has liquidity on its balance sheet to cover the charges.

Trace Urdan, an analyst with Signal Hill Capital Group, said the relatively minor findings were "a spectacularly positive result."

Despite its current burden, the company got a big worry off its radar screen with a December agreement to pay $67.5 million to the Securities and Exchange Commission and $11 million in plaintiff attorneys' fees to end a long-running dispute over recruiter compensation.

For the quarter ended Nov. 30, Apollo reported earnings of $240.1 million, or $1.54 a share, compared with $180.4 million, or $1.12 a share, a year earlier. The latest quarter included a 7-cent gain related to an Internal Revenue Service settlement.

Revenue surged 31% to $1.27 billion.

Analysts polled by Thomson Reuters projected earnings of $1.46 on revenue of $1.23 billion.

Degreed enrollment increased 18%, to 455,600, while new degreed enrollment climbed 14%. Enrollment growth has slowed over the past few quarters.

Apollo's bad debt expense jumped to 4.9% of revenue from 3.6% a year earlier, which the company attributed to the economic downturn and more students in associate degree programs.

"We remain committed to providing access to high-quality education, while ensuring that only students who have a reasonable chance to succeed enroll in our institutions," co-Chief Executive Greg Cappelli said in a statement.

The company said it is working to educate students on financial opportunities and provide more support before they even enroll. Apollo expects bad debt to continue rising for the near future.

For-profit schools have come under fire lately for their recruiting tactics, with critics claiming the colleges enroll students who can't graduate or find well paying jobs, leaving them unable to repay the loans they borrowed to attend school. The schools derive the bulk of their revenue from federally guaranteed student loans.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

(Jay Miller contributed to this article.)

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