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10-Q
APOLLO EDUCATION GROUP INC filed this Form 10-Q on 06/25/2014
Entire Document
 
APOL - May 31 2014 - 10-Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: May 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
Commission File Number: 0-25232
APOLLO EDUCATION GROUP, INC.
(Exact name of registrant as specified in its charter)

ARIZONA
(State or other jurisdiction of incorporation or organization)
86-0419443
(I.R.S. Employer Identification No.)

4025 S. RIVERPOINT PARKWAY, PHOENIX, ARIZONA 85040
(Address of principal executive offices)
(480) 966-5394
(Registrant’s telephone number, including area code)
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES þ     NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES þ     NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ
As of June 18, 2014, the following shares of stock were outstanding:
Apollo Education Group, Inc. Class A common stock, no par value
109,234,000 Shares
Apollo Education Group, Inc. Class B common stock, no par value
475,000 Shares
 



APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 31, 2014
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact may be forward-looking statements. Such forward-looking statements include, among others, those statements regarding future events and future results of Apollo Education Group, Inc. (“the Company,” “Apollo Education Group,” “Apollo,” “APOL,” “we,” “us,” or “our”) that are based on current expectations, estimates, forecasts, and the beliefs and assumptions of us and our management, and speak only as of the date made and are not guarantees of future performance or results. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “could,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “predict,” “target,” “potential,” “continue,” “objectives,” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily estimates based upon current information and involve a number of risks and uncertainties. Such statements should be viewed with caution. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to:
Changes in the regulation of the U.S. education industry and eligibility of schools, including in particular proprietary schools, to participate in U.S. federal student financial aid programs, including the regulatory and other requirements discussed in Item 1, Business, of our Annual Report on Form 10-K for the year ended August 31, 2013, under “Accreditation and Jurisdictional Authorizations,” “Financial Aid Programs” and “Regulatory Environment”;
Each of the factors discussed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended August 31, 2013; and
Those factors set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended August 31, 2013 and Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q.
The cautionary statements referred to above also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements for any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements.


3


Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
As of
($ in thousands)
May 31,
2014
 
August 31,
2013
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
638,796

 
$
1,414,485

Restricted cash and cash equivalents
256,137

 
259,174

Marketable securities
168,959

 
105,809

Accounts receivable, net
201,660

 
215,401

Prepaid taxes
1,701

 
30,359

Deferred tax assets
76,343

 
60,294

Other current assets
62,813

 
64,134

Total current assets
1,406,409

 
2,149,656

Marketable securities
105,681

 
43,941

Property and equipment, net
447,968

 
472,614

Goodwill
259,672

 
103,620

Intangible assets, net
197,443

 
132,192

Deferred tax assets
68,409

 
63,894

Other assets
45,276

 
32,030

Total assets
$
2,530,858

 
$
2,997,947

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY
Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
31,093

 
$
628,050

Accounts payable
65,162

 
73,123

Income taxes payable
10,319

 

Student deposits
296,625

 
309,176

Deferred revenue
218,246

 
213,260

Accrued and other current liabilities
326,642

 
346,706

Total current liabilities
948,087

 
1,570,315

Long-term debt
39,756

 
64,004

Deferred tax liabilities
32,219

 
12,177

Other long-term liabilities
241,662

 
233,442

Total liabilities
1,261,724

 
1,879,938

Commitments and contingencies


 


Redeemable noncontrolling interests
58,744

 

Shareholders’ equity:
 

 
 

Preferred stock, no par value

 

Apollo Education Group Class A nonvoting common stock, no par value
103

 
103

Apollo Education Group Class B voting common stock, no par value
1

 
1

Additional paid-in capital

 

Apollo Education Group Class A treasury stock, at cost
(3,922,049
)
 
(3,824,758
)
Retained earnings
5,157,935

 
4,978,815

Accumulated other comprehensive loss
(26,543
)
 
(36,563
)
Total Apollo shareholders’ equity
1,209,447

 
1,117,598

Noncontrolling interests
943

 
411

Total equity
1,210,390

 
1,118,009

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
2,530,858

 
$
2,997,947

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

4


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
Three Months Ended
May 31,
 
Nine Months Ended
May 31,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Net revenue
$
799,919

 
$
946,774

 
$
2,335,312

 
$
2,836,329

Costs and expenses:
 
 
 
 
 
 
 
Instructional and student advisory
327,764

 
393,387

 
987,018

 
1,209,239

Marketing
139,868

 
156,918

 
421,104

 
493,104

Admissions advisory
58,202

 
65,078

 
164,783

 
204,618

General and administrative
75,618

 
82,717

 
218,524

 
237,474

Depreciation and amortization
37,721

 
38,360

 
111,524

 
123,554

Provision for uncollectible accounts receivable
12,485

 
15,258

 
37,997

 
67,566

Contingent consideration charges and acquisition costs
16,168

 

 
29,173

 

Restructuring and other charges
14,904

 
63,103

 
62,076

 
131,295

Litigation charge (credit)
4,125

 

 
13,125

 
(23,200
)
Total costs and expenses
686,855

 
814,821

 
2,045,324

 
2,443,650

Operating income
113,064

 
131,953

 
289,988

 
392,679

Interest income
453

 
506

 
1,620

 
1,443

Interest expense
(1,915
)
 
(1,940
)
 
(5,984
)
 
(6,074
)
Other (expense) income, net
(284
)
 
(862
)
 
630

 
811

Income before income taxes
111,318

 
129,657

 
286,254

 
388,859

Provision for income taxes
(46,308
)
 
(49,487
)
 
(110,026
)
 
(161,290
)
Net income
65,010

 
80,170

 
176,228

 
227,569

Net loss (income) attributable to noncontrolling interests
1,015

 
(217
)
 
3,293

 
(594
)
Net income attributable to Apollo
$
66,025

 
$
79,953

 
$
179,521

 
$
226,975

Basic income per share attributable to Apollo
$
0.60

 
$
0.71

 
$
1.60

 
$
2.02

Diluted income per share attributable to Apollo
$
0.59

 
$
0.71

 
$
1.59

 
$
2.01

Basic weighted average shares outstanding
110,613

 
112,742

 
112,024

 
112,579

Diluted weighted average shares outstanding
112,082

 
113,372

 
113,129

 
113,121

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


5


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
May 31,
 
Nine Months Ended
May 31,
($ in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
65,010

 
$
80,170

 
$
176,228

 
$
227,569

Other comprehensive income (loss) (net of tax):
 
 
 
 
 
 
 
Currency translation gain (loss)(1)
5,186

 
(1,359
)
 
12,504

 
(3,989
)
Comprehensive income
70,196

 
78,811

 
188,732

 
223,580

Comprehensive (income) loss attributable to noncontrolling interests
(690
)
 
(196
)
 
809

 
(269
)
Comprehensive income attributable to Apollo
$
69,506

 
$
78,615

 
$
189,541

 
$
223,311

(1) The tax effect on other comprehensive income during the three and nine months ended May 31, 2014 and 2013, respectively, is not significant.
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
(Unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Apollo Education Group
 
Additional
Paid-in
Capital
 
Treasury Stock
 
 
 
Accumulated Other
Comprehensive Loss
 
Total Apollo
Shareholders’ Equity
 
Noncontrolling
Interests
 
 
 
 
 
 
Class A Nonvoting
 
Class B Voting
 
 
Apollo Education Group Class A
 
Retained
Earnings
 
 
 
 
Total Equity
 
 
Redeemable Noncontrolling Interests
($ in thousands)
Shares
 
Stated
Value
 
Shares
 
Stated
Value
 
 
Shares
 
Cost
 
 
 
 
 
 
 
Balance as of August 31, 2013
188,007

 
$
103

 
475

 
$
1

 
$

 
75,182

 
$
(3,824,758
)
 
$
4,978,815

 
$
(36,563
)
 
$
1,117,598

 
$
411

 
$
1,118,009

 
 
$

Share repurchases

 

 

 

 

 
3,955

 
(118,478
)
 

 

 
(118,478
)
 

 
(118,478
)
 
 

Share reissuances

 

 

 

 
(25,212
)
 
(503
)
 
21,187

 
5,818

 

 
1,793

 

 
1,793

 
 

Net tax effect for stock incentive plans

 

 

 

 
(8,482
)
 

 

 

 

 
(8,482
)
 

 
(8,482
)
 
 

Share-based compensation

 

 

 

 
33,694

 

 

 

 

 
33,694

 

 
33,694

 
 

Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 
 
53,866

Currency translation adjustment, net of tax

 

 

 

 

 

 

 

 
10,020

 
10,020

 
199

 
10,219

 
 
2,285

Redemption value adjustments

 

 

 

 

 

 

 
(6,219
)
 

 
(6,219
)
 

 
(6,219
)
 
 
6,219

Net income (loss)

 

 

 

 

 

 

 
179,521

 

 
179,521

 
333

 
179,854

 
 
(3,626
)
Balance as of May 31, 2014
188,007

 
$
103

 
475

 
$
1

 
$

 
78,634

 
$
(3,922,049
)
 
$
5,157,935

 
$
(26,543
)
 
$
1,209,447

 
$
943

 
$
1,210,390

 
 
$
58,744

Balance as of August 31, 2012
188,007

 
$
103

 
475

 
$
1

 
$
93,770

 
76,239

 
$
(3,878,612
)
 
$
4,743,150

 
$
(30,034
)
 
$
928,378

 
$
(4,055
)
 
$
924,323

 
 
 
Share repurchases

 

 

 

 

 
262

 
(5,696
)
 

 

 
(5,696
)
 

 
(5,696
)
 
 
 
Share reissuances

 

 

 

 
(32,556
)
 
(848
)
 
35,549

 

 

 
2,993

 

 
2,993

 
 
 
Net tax effect for stock incentive plans

 

 

 

 
(23,278
)
 

 

 

 

 
(23,278
)
 

 
(23,278
)
 
 
 
Share-based compensation

 

 

 

 
39,888

 

 

 

 

 
39,888

 

 
39,888

 
 
 
Currency translation adjustment, net of tax

 

 

 

 

 

 

 

 
(3,664
)
 
(3,664
)
 
(325
)
 
(3,989
)
 
 
 
Purchase of noncontrolling interest

 

 

 

 
(48,543
)
 

 

 

 
(4,886
)
 
(53,429
)
 
4,929

 
(48,500
)
 
 
 
Net income

 

 

 

 

 

 

 
226,975

 

 
226,975

 
594

 
227,569

 
 
 
Balance as of May 31, 2013
188,007

 
$
103

 
475

 
$
1

 
$
29,281

 
75,653

 
$
(3,848,759
)
 
$
4,970,125

 
$
(38,584
)
 
$
1,112,167

 
$
1,143

 
$
1,113,310

 
 

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


7


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
May 31,
($ in thousands)
2014
 
2013
Operating activities:
 

 
 

Net income
$
176,228

 
$
227,569

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Share-based compensation
33,694

 
39,888

Excess tax benefits from share-based compensation
(49
)
 
(14
)
Depreciation and amortization
111,524

 
123,554

Accelerated depreciation included in restructuring
6,159

 
41,581

(Gain) loss on asset dispositions and write-offs, net
(862
)
 
3,976

Non-cash foreign currency loss, net
642

 
810

Provision for uncollectible accounts receivable
37,997

 
67,566

Deferred income taxes
(22,067
)
 
(21,243
)
Changes in assets and liabilities, excluding the impact of acquisitions:
 
 
 

Restricted cash and cash equivalents
3,659

 
(747
)
Accounts receivable
(20,472
)
 
(70,761
)
Other assets
(9,436
)
 
(13,842
)
Accounts payable
(10,789
)
 
2,239

Income taxes
39,724

 
41,205

Student deposits
(15,436
)
 
(10,430
)
Deferred revenue
(7,768
)
 
(28,672
)
Accrued and other liabilities
(33,742
)
 
(12,326
)
Net cash provided by operating activities
289,006

 
390,353

Investing activities:
 

 
 

Purchases of property and equipment
(80,642
)
 
(96,735
)
Purchases of marketable securities
(265,083
)
 
(130,207
)
Maturities of marketable securities
136,157

 
15,890

Acquisitions, net of cash acquired
(119,454
)
 

Other investing activities
3,446

 
(1,500
)
Net cash used in investing activities
(325,576
)
 
(212,552
)
Financing activities:
 

 
 

Payments on borrowings
(624,393
)
 
(633,450
)
Proceeds from borrowings
1,081

 
2,176

Purchase of noncontrolling interest

 
(42,500
)
Share repurchases
(118,478
)
 
(5,696
)
Share reissuances
1,793

 
2,993

Excess tax benefits from share-based compensation
49

 
14

Net cash used in financing activities
(739,948
)
 
(676,463
)
Exchange rate effect on cash and cash equivalents
829

 
(974
)
Net decrease in cash and cash equivalents
(775,689
)
 
(499,636
)
Cash and cash equivalents, beginning of period
1,414,485

 
1,276,375

Cash and cash equivalents, end of period
$
638,796

 
$
776,739

Supplemental disclosure of cash flow and non-cash information:
 

 
 

Cash paid for income taxes, net of refunds
$
113,753

 
$
134,201

Cash paid for interest
5,859

 
5,903

Restricted stock units vested and released
10,195

 
15,617

Capital lease additions

 
3,500

Credits received for tenant improvements

 
1,540

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

8


APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations
Apollo Education Group, Inc. and its wholly-owned subsidiaries and majority-owned subsidiaries, collectively referred to herein as “the Company,” “Apollo Education Group,” “Apollo,” “APOL,” “we,” “us” or “our” has been an education provider since 1973. We offer educational programs and services, online and on-campus, at the undergraduate, master’s and doctoral levels. Our learning platforms include the following:
The University of Phoenix, Inc. (“University of Phoenix”);
Apollo Global, Inc. (“Apollo Global”):
BPP Holdings Limited (“BPP”) in the United Kingdom (“U.K.”);
Open Colleges Australia Pty Ltd. (“Open Colleges”) in Australia;
Universidad Latinoamericana (“ULA”) in Mexico;
Universidad de Artes, Ciencias y Comunicación (“UNIACC”) in Chile;
Milpark Education (Pty) Ltd. (“Milpark Education”) in South Africa; and
India Education Services Private Ltd. in India;
Western International University, Inc. (“Western International University” or “WIU”);
Institute for Professional Development (“IPD”);
The College for Financial Planning Institutes Corporation (“CFFP”);
Carnegie Learning, Inc. (“Carnegie Learning”); and
Apollo Lightspeed, LLC (“Apollo Lightspeed”).
During the first quarter of fiscal year 2014, Apollo changed its name from Apollo Group, Inc. to Apollo Education Group, Inc.
During the first nine months of fiscal year 2014, Apollo Global acquired controlling interests in Milpark Education and Open Colleges. Refer to Note 4, Acquisitions.
Note 2. Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements include the accounts of Apollo Education Group, Inc., our wholly-owned subsidiaries, and subsidiaries that we control. These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and, in the opinion of management, contain all adjustments, consisting of normal, recurring adjustments, necessary to fairly present the 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 notes thereto contained in our 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 22, 2013. We consistently applied the accounting policies described in Item 8, Financial Statements and Supplementary Data, in our 2013 Annual Report on Form 10-K in preparing these unaudited interim condensed consolidated financial statements.
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions 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. Actual results could differ from these estimates.
Our fiscal year is from September 1 to August 31. Unless otherwise noted, references to particular years or quarters refer to our fiscal years and the associated quarters of those fiscal years.
Our operations are generally subject to seasonal trends. We experience, 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. Although University of Phoenix enrolls students throughout the year, its net revenue is generally lower in our second fiscal quarter (December through February) than the other quarters due to holiday breaks. Because of the seasonal nature of our business and other factors, the results of operations for the three and nine months ended May 31, 2014 are not necessarily indicative of results to be expected for the entire fiscal year.

9

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Reclassifications
We have reclassified our Condensed Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interests and our Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2013 to conform to our current presentation as follows:
During the third quarter of fiscal year 2014, we began presenting share reissuances in the aggregate, which consists of reissuances attributable to our employee stock purchase plan and our equity compensation plans;
During fiscal year 2013, we began presenting amortization of deferred gains on sale-leasebacks and amortization of lease incentives as a component of the change in accrued and other liabilities; and
During the third quarter of fiscal year 2014, we began presenting litigation charge (credit) as a component of the change in accrued and other liabilities.
These reclassifications did not impact total cash provided by operating activities.
Recent Accounting Pronouncements
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. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. Accordingly, the standard is effective for us on September 1, 2017. We are currently evaluating the impact that the standard will have on our financial condition, results of operations, and disclosures.
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014 and is effective for us on September 1, 2015. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued. We are currently evaluating the impact that ASU 2014-08 will have on our financial condition, results of operations, and disclosures.
Note 3. Restructuring and Other Charges
The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We are reengineering our business processes and refining our educational delivery systems to improve the effectiveness of our services to students, and reducing the size of our services infrastructure and associated operating expenses to align with our reduced enrollment and revenue. We have incurred restructuring and other charges associated with these activities beginning in fiscal year 2011 as summarized below:
 
Three Months Ended
May 31,
 
Nine Months Ended
May 31,
 
Cumulative
Costs as of
May 31, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
Lease and related costs, net
$
11,916

 
$
55,737

 
$
35,181

 
$
100,489

 
$
207,492

Severance and other employee separation costs
2,623

 
5,084

 
22,740

 
24,244

 
73,766

Other restructuring related costs
365

 
2,282

 
4,155

 
6,562

 
41,051

Restructuring and other charges
$
14,904

 
$
63,103

 
$
62,076

 
$
131,295

 
$
322,309

The following summarizes the restructuring and other charges in our segment reporting format:
 
Three Months Ended
May 31,
 
Nine Months Ended
May 31,
 
Cumulative
Costs as of
May 31, 2014
($ in thousands)
2014
 
2013
 
2014
 
2013
 
University of Phoenix
$
9,570

 
$
56,777

 
$
46,225

 
$
112,118

 
$
247,897

Apollo Global
3,817

 
684

 
5,384

 
4,099

 
17,149

Other
1,517

 
5,642

 
10,467

 
15,078

 
57,263

Restructuring and other charges
$
14,904

 
$
63,103

 
$
62,076

 
$
131,295

 
$
322,309


10

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following details the changes in our restructuring liabilities by type of cost during the nine months ended May 31, 2014:
($ in thousands)
Lease and
Related Costs,
Net
 
Severance and
Other Employee
Separation Costs
 
Other
Restructuring
Related Costs
 
Total
Balance at August 31, 2013(1)
$
104,048

 
$
7,623

 
$
8,130

 
$
119,801

Restructuring and other charges
35,181

 
22,740

 
4,155

 
62,076

Non-cash adjustments(2)
(1,972
)
 
(2,727
)
 

 
(4,699
)
Payments
(39,614
)
 
(22,169
)
 
(11,355
)
 
(73,138
)
Balance at May 31, 2014(1)
$
97,643

 
$
5,467

 
$
930

 
$
104,040

(1) The current portion of our restructuring liabilities was $44.4 million and $55.2 million as of May 31, 2014 and August 31, 2013, respectively. These balances are included in accrued and other current liabilities on our Condensed Consolidated Balance Sheets and the long-term portion is included in other long-term liabilities. The gross, undiscounted obligation associated with our restructuring liabilities as of May 31, 2014 is approximately $170 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.
(2) Non-cash adjustments for lease and related costs, net represents $6.2 million of accelerated depreciation, partially offset by the release of certain associated liabilities such as deferred rent. Non-cash adjustments for severance and other employee separation costs represents share-based compensation.
Lease and Related Costs, Net - Beginning in fiscal year 2011, University of Phoenix began rationalizing its administrative real estate facilities. In addition to continuing to rationalize its administrative facilities, University of Phoenix began closing 115 of its ground locations during fiscal year 2013. After these real estate rationalization activities have been completed, the University expects to operate 110 ground campus locations in 36 states, the District of Columbia and the Commonwealth of Puerto Rico.
As of May 31, 2014, University of Phoenix has closed the substantial majority of the total square feet it plans to exit. We have recorded $149.5 million of initial aggregate charges, representing the estimated fair value of future contractual operating lease obligations, which were recorded in the periods we ceased using the respective facilities, $25.9 million of which was recorded in the nine months ended May 31, 2014. The other lease and related costs in the nine months ended May 31, 2014 consist of accelerated depreciation, as discussed below, and interest accretion on the lease obligations.
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%-6% 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 and subleases we expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. As of May 31, 2014, we have recorded adjustments to our initial lease obligation liabilities for interest accretion and immaterial adjustments for changes in estimated sublease income.
Lease and related costs, net includes $6.2 million of accelerated depreciation in the nine months ended May 31, 2014 associated with revising the useful lives of the fixed assets at the facilities we are closing through their expected closure dates. Prior to revising the useful lives, we perform a recoverability analysis for the facilities’ fixed assets by comparing the estimated undiscounted cash flows of the locations through their expected closure dates to the carrying amount of the locations’ fixed assets. Based on such analyses, we recorded immaterial impairment charges during fiscal year 2013 and no impairment charges in the nine months ended May 31, 2014.
Severance and Other Employee Separation Costs - Beginning in fiscal year 2011 and continuing into fiscal year 2014, we have implemented workforce reductions as we reengineer our business processes, refine our educational delivery systems and reduce our operating costs to align with our reduced enrollment and revenue. We incurred severance and other employee separation costs of $22.7 million in the nine months ended May 31, 2014. These costs are included in the reportable segments in which the respective personnel were employed.
Excluding interest accretion associated with our lease obligation liabilities, we expect to incur approximately $25 million of future restructuring charges for the initiatives announced to date. These costs will generally be incurred over the period of time

11

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations associated with campuses that have not yet been closed.
Note 4. Acquisitions
On May 20, 2014, Apollo Global acquired an 81% consolidated interest in Milpark Education, a provider of education and training to adult learners in South Africa, for approximately ZAR 265 million (approximated $26 million on the transaction date). This acquisition, along with the Open Colleges acquisition described below, provides access to new markets and supports our strategy to diversify and expand our global operations.
On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, a provider of education and training to adult learners in Australia. We paid A$110.3 million (equivalent to $98.1 million on the transaction date), plus contingent consideration of up to A$52.5 million (equivalent to $48.5 million as of May 31, 2014) upon the satisfaction of specified conditions. If the applicable conditions are satisfied, the amount of the contingent consideration will be calculated principally on the basis of Open Colleges’ operating results for its fiscal year ending June 30, 2014 as defined in the acquisition agreement. On the acquisition date, we estimated the fair value of the contingent consideration to be $21.4 million using a discounted cash flow valuation method encompassing significant unobservable inputs. The inputs included estimated operating results for the performance period, probability weightings assigned to the operating results scenarios and the discount rate applied.
We also have the option to buy the remaining noncontrolling interests associated with the above acquisitions, and the noncontrolling shareholders have the option to sell their shares to us. The options are exercisable in the third quarter of our fiscal year 2016 for Milpark Education and in early calendar 2017 for Open Colleges, or earlier in limited circumstances for both acquisitions. The price for the options is based on a formula specified at the respective acquisition dates and is principally based on a multiple of the respective acquired entity’s operating results as defined in the acquisition agreements. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the respective noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified both of the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets. Refer to Note 12, Shareholders’ Equity and Redeemable Noncontrolling Interests.
We incurred transaction costs of $0.7 million and $3.6 million for the Milpark Education and Open Colleges acquisitions, respectively, and these costs are included in contingent consideration charges and acquisition costs on our Condensed Consolidated Statements of Income in the nine months ended May 31, 2014. We accounted for the acquisitions as business combinations and allocated the purchase price to the assets acquired and liabilities assumed at fair value as summarized below:
 
Milpark Education
 
Open Colleges
 
Purchase Price
Allocation
($ in thousands)
 
Weighted Average
Useful Life
(Years)
 
Purchase Price
Allocation
($ in thousands)
 
Weighted Average
Useful Life
(Years)
Net working capital deficit
$
(307
)
 
 
 
$
(10,979
)
 
 
Property and equipment
518

 
 
 
2,684

 
 
Intangibles:
 
 
 
 
 
 
 
Course designations

 
 
 
20,652

 
5.0
Trademarks
5,778

 
Indefinite
 
17,919

 
10.0
Course curriculum
1,203

 
2.0
 
15,790

 
4.0
Customer relationships
2,149

 
2.5
 
5,238

 
1.0
Accreditation
1,270

 
Indefinite
 
976

 
4.0
Goodwill
22,227

 
 
 
127,656

 
 
Deferred taxes, net
(2,818
)
 
 
 
(9,279
)
 
 
Total assets acquired and liabilities assumed
30,020

 
 
 
170,657

 
 
Less: Fair value of redeemable noncontrolling interests
(2,669
)
 
 
 
(51,197
)
 
 
Total fair value of consideration transferred
27,351

 
 
 
119,460

 
 
Less: Fair value of contingent consideration

 
 
 
(21,371
)
 
 
Less: Cash acquired
(2,834
)
 
 
 
(3,152
)
 
 
Cash paid for acquisition, net of cash acquired
$
24,517

 
 
 
$
94,937

 
 

12

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We determined the fair value of assets acquired, liabilities assumed and the redeemable noncontrolling interests 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 course designations and trademarks for both acquisitions and the course curriculum for Open Colleges 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 remaining intangibles were valued using the excess earnings method, cost savings method, or replacement cost approach.
Deferred revenue - Deferred revenue is included in net working capital deficit in the above table. 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.
Other assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.
Redeemable noncontrolling interests - We estimated the fair value of the redeemable noncontrolling interests principally as the noncontrolling ownership percentage of the implied fair value of each acquired entity as a whole. We reduced the fair value of the Milpark Education noncontrolling interest for certain discounts including lack of control. Based on the terms of the Open Colleges acquisition, including the structure of the redemption options held by the noncontrolling shareholders and our future operating plans for the entity, we did not apply a discount to the fair value of the noncontrolling interest.
We recorded $22.2 million and $127.7 million of goodwill as a result of the Milpark Education and Open Colleges acquisitions, respectively, both of which are not expected to be deductible for tax purposes. The goodwill for both acquisitions is principally attributable to the future earnings potential associated with student 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 for both reporting units.
We assigned an indefinite useful life to the acquired Milpark Education trademark and accreditation 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, as applicable, we intend to renew the intangible and renewal can be accomplished at little cost. We determined all of the other acquired intangibles are finite-lived and we are amortizing them on either a straight-line or an accelerated basis that reflects 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 2.3 years and 5.9 years for Milpark Education and Open Colleges, respectively. Refer to Note 7, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.
The operating results of Milpark Education and Open Colleges are included in our condensed consolidated financial statements from the date of each respective acquisition. We have not provided pro forma information because their results of operations are not material, both individually and in the aggregate, to our consolidated results of operations.

13

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 5. Financial Instruments
The following summarizes our cash and cash equivalents, restricted cash and cash equivalents and marketable securities by significant financial instrument category as of the respective periods:
 
May 31, 2014
($ in thousands)
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
 
Total
Carrying
Value
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Cash
$
720,789

 
$

 
$

 
$
720,789

 
$

 
$

 
$
720,789

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
147,516

 

 

 
147,516

 

 

 
147,516

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds
1,402

 
73,602

 
40,898

 
115,902

 
169

 
(4
)
 
116,067

Commercial paper

 
14,030

 

 
14,030

 
1

 

 
14,031

Corporate bonds
201

 
44,219

 
54,027

 
98,447

 
183

 
(15
)
 
98,615

Time deposits
25,025

 
25,036

 

 
50,061

 

 

 
50,061

Other

 
12,072

 
4,810

 
16,882

 
3

 
(1
)
 
16,884

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction-rate securities

 

 
5,946

 
5,946

 
 
 
 
 


Total
$
894,933

 
$
168,959

 
$
105,681

 
$
1,169,573

 
 
 
 
 
 
 
August 31, 2013
($ in thousands)
Cash and Cash
Equivalents(1)
 
Current
Marketable
Securities
 
Noncurrent
Marketable
Securities
 
Total
Carrying
Value
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
Cash
$
874,074

 
$

 
$

 
$
874,074

 
$

 
$

 
$
874,074

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
732,530

 

 

 
732,530

 

 

 
732,530

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal bonds
2,055

 
69,621

 
24,070

 
95,746

 
19

 
(54
)
 
95,711

Commercial paper

 
9,828

 

 
9,828

 

 

 
9,828

Corporate bonds

 
24,503

 
13,925

 
38,428

 
6

 
(40
)
 
38,394

Certificates of deposit
65,000

 
1,200

 

 
66,200

 

 

 
66,200

Other

 
657

 

 
657

 

 

 
657

Level 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
Auction-rate securities

 

 
5,946

 
5,946

 
 
 
 
 
 
Total
$
1,673,659

 
$
105,809

 
$
43,941

 
$
1,823,409

 
 
 
 
 
 
(1) Cash and cash equivalents includes restricted cash and cash equivalents.
We measure our money market funds on a recurring basis at fair value using Level 1 inputs that primarily consist of real-time quotes for transactions in active exchange markets involving identical assets.
Other than our auction-rate securities, which are discussed further below, all of our marketable securities are classified as held-to-maturity as we have the intent and ability to hold them until contractual maturity, which will occur within two years. Our held-to-maturity securities are reported at amortized cost and we have not recorded gains or losses on our held-to-maturity investments. The estimated fair values of our held-to-maturity investments are determined using a market approach with Level 2 observable inputs including quoted prices for similar assets in active markets, or quoted prices for identical or similar assets in markets that are not active.
Our auction-rate securities are classified as available-for-sale and measured at fair value on a recurring basis. Fair value is measured using a discounted cash flow model encompassing Level 3 significant unobservable inputs such as estimated interest

14

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

rates, credit spreads, timing and amount of cash flows, credit quality of the underlying securities and illiquidity considerations. We have classified our auction-rate securities as noncurrent due to illiquidity considerations.
There were no changes in the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended May 31, 2014.
Note 6. Accounts Receivable, Net
Accounts receivable, net consist of the following as of the respective periods:
($ in thousands)
May 31,
2014
 
August 31,
2013
Student accounts receivable
$
234,091

 
$
243,660

Less allowance for doubtful accounts
(50,617
)
 
(59,744
)
Net student accounts receivable
183,474

 
183,916

Other receivables
18,186

 
31,485

Total accounts receivable, net
$
201,660

 
$
215,401

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)
2014
 
2013
 
2014
 
2013
Beginning allowance for doubtful accounts
$
53,038

 
$
84,773

 
$
59,744

 
$
107,230

Provision for uncollectible accounts receivable
12,485

 
15,258

 
37,997

 
67,566

Write-offs, net of recoveries
(14,906
)
 
(33,304
)
 
(47,124
)
 
(108,069
)
Ending allowance for doubtful accounts
$
50,617

 
$
66,727

 
$
50,617

 
$
66,727

Note 7. Goodwill and Intangibles
The following details changes in the carrying amount of our goodwill by reportable segment during the nine months ended May 31, 2014:
($ in thousands)
University of
Phoenix
 
Apollo
Global
 
Other
 
Total
Goodwill as of August 31, 2013
$
71,812

 
$
14,917

 
$
16,891

 
$
103,620

Acquisitions(1)

 
149,883

 

 
149,883

Currency translation adjustment

 
6,169

 

 
6,169

Goodwill as of May 31, 2014
$
71,812

 
$
170,969

 
$
16,891

 
$
259,672

(1) Represents goodwill acquired in the Milpark Education and Open Colleges acquisitions. Refer to Note 4, Acquisitions.


15

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Intangible assets consist of the following as of the respective periods:
 
May 31, 2014
 
August 31, 2013
($ in thousands)
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
Gain (Loss)
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Effect of
Foreign
Currency
Translation
Loss
 
Net
Carrying
Amount
Software and technology
$
42,389

 
$
(23,031
)
 
$

 
$
19,358

 
$
42,389

 
$
(16,673
)
 
$

 
$
25,716

Accreditations and designations(1)
21,628

 
(1,866
)
 
810

 
20,572

 

 

 

 

Trademarks(1)
17,919

 
(766
)
 
744

 
17,897

 

 

 

 

Curriculum(1)
16,993

 
(1,691
)
 
709

 
16,011

 

 

 

 

Student and customer relationships(1)
15,934

 
(7,751
)
 
(1,159
)
 
7,024

 
12,026

 
(7,727
)
 
(1,363
)
 
2,936

Other(1)
20,891

 
(19,659
)
 
(609
)
 
623

 
20,891

 
(18,706
)
 
(777
)
 
1,408

Total finite-lived intangibles
135,754

 
(54,764
)
 
495

 
81,485

 
75,306

 
(43,106
)
 
(2,140
)
 
30,060

Trademarks(1)
106,514

 

 
1,070

 
107,584

 
100,736

 

 
(5,347
)
 
95,389

Accreditations and designations(1)
8,530

 

 
(156
)
 
8,374

 
7,260

 

 
(517
)
 
6,743

Total indefinite-lived intangibles
115,044

 

 
914

 
115,958

 
107,996

 

 
(5,864
)
 
102,132

Total intangible assets, net
$
250,798

 
$
(54,764
)
 
$
1,409

 
$
197,443

 
$
183,302

 
$
(43,106
)
 
$
(8,004
)
 
$
132,192

(1) We acquired certain intangibles during fiscal year 2014 as a result of our acquisitions. Refer to Note 4, Acquisitions.
As of May 31, 2014, the estimated future amortization expense of our finite-lived intangibles is as follows:
($ in thousands)
 
Remainder of fiscal year 2014
$
7,205

2015
23,996

2016
20,293

2017
10,982

2018
7,619

2019
3,297

Thereafter
8,093

Total estimated future amortization expense(1)
$
81,485

(1) Estimated future amortization expense may vary as acquisitions and dispositions occur in the future and as a result of foreign currency translation adjustments.
At May 31, 2014, we completed our annual goodwill and indefinite-lived intangibles impairment tests, as applicable, for the following reporting units that have annual test dates of May 31:
University of Phoenix;
ULA and UNIACC (included in the Apollo Global reportable segment); and
Western International University and Carnegie Learning (included in Other in our segment reporting).
We determined there was no impairment for the applicable reporting units and assets as of May 31, 2014.
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, 2014 and August 31, 2013:
 
 
 
Fair Value Measurements at Reporting Date Using
 
Fair Value
as of Respective
Reporting Date
 
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, 2014
$
52,330

 
$

 
$

 
$
52,330

Contingent consideration as of August 31, 2013
$
5,277

 
$

 
$

 
$
5,277


16

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our contingent consideration liabilities are classified within Level 3 and 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:
Open Colleges - We acquired Open Colleges during the second quarter of fiscal year 2014 and are obligated to pay contingent consideration of up to A$52.5 million (equivalent to $48.5 million as of May 31, 2014) upon the satisfaction of specified conditions. If the applicable conditions are satisfied, the amount of the contingent consideration will be calculated principally on the basis of Open Colleges’ operating results for its fiscal year ending June 30, 2014 as defined in the acquisition agreement. Based on information available as of the acquisition date, we initially estimated the fair value of the contingent consideration to be $21.4 million. As of May 31, 2014, we increased the estimated fair value to $46.0 million based on information that did not exist at the acquisition date, including Open Colleges’ recent operating results, which have exceeded expected results as of the acquisition date. The increase in fair value is included in contingent consideration charges and acquisition costs on our Condensed Consolidated Statements of Income during fiscal year 2014. The substantial majority of the liability balance is expected to be paid within one year and is included in 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, 2014, the estimated fair value for this contingent consideration was $6.3 million.
We did not change our valuation techniques associated with recurring fair value measurements from prior periods. 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)
2014
 
2013
 
2014
 
2013
Beginning balance
$
36,023

 
$
5,855

 
$
5,277

 
$

Initial contingent consideration at fair value

 

 
21,371

 
6,000

Change in fair value included in net income
15,907

 
167

 
24,661

 
22

Currency translation adjustment
400

 

 
1,021

 

Ending balance
$
52,330

 
$
6,022

 
$
52,330

 
$
6,022

Liabilities measured at fair value on a nonrecurring basis during the nine months ended May 31, 2014, all of which are included in other liabilities on our Condensed Consolidated Balance Sheets, consist of the following:
 
 
 
Fair Value Measurements at Measurement Dates Using
 
 
($ in thousands)
Fair Value at
Measurement
Dates
 
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,
2014
Initial lease obligations
$
25,910

 
$

 
$

 
$
25,910

 
$
25,910

During the nine months ended May 31, 2014, we recorded $25.9 million of aggregate initial lease obligations at fair value associated with closing certain leased facilities as part of our restructuring activities. We recorded the lease obligation liabilities on the dates we ceased use of the facilities, and we measured the liabilities at fair value using Level 3 inputs included in the valuation method. Refer to Note 3, Restructuring and Other Charges.

17

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 periods:
($ in thousands)
May 31,
2014
 
August 31,
2013
Salaries, wages and benefits
$
88,847

 
$
135,553

Restructuring obligations
44,416

 
55,191

Contingent consideration, current portion
38,337

 

Accrued legal and other professional obligations
37,085

 
31,310

Accrued advertising
26,563

 
45,850

Student refunds, grants and scholarships
19,313

 
7,180

Deferred rent and other lease liabilities
12,048

 
14,001

Curriculum materials
11,442

 
10,764

Other
48,591

 
46,857

Total accrued and other current liabilities
$
326,642

 
$
346,706

Other long-term liabilities consist of the following as of the respective periods:
($ in thousands)
May 31,
2014
 
August 31,
2013
Deferred rent and other lease liabilities
$
60,714

 
$
67,641

Restructuring obligations
59,624

 
64,610

Deferred revenue
44,080

 
21,080

Deferred gains on sale-leasebacks
22,010

 
22,894

Uncertain tax positions
12,323

 
33,637

Other
42,911

 
23,580

Total other long-term liabilities
$
241,662

 
$
233,442

Note 10. Debt
Debt and short-term borrowings consist of the following as of the respective periods:
($ in thousands)
May 31,
2014
 
August 31,
2013
Revolving Credit Facility, see terms below
$

 
$
605,000

Capital lease obligations
35,796

 
49,628

Other, see terms below
35,053

 
37,426

Total debt
70,849

 
692,054

Less short-term borrowings and current portion of long-term debt
(31,093
)
 
(628,050
)
Long-term debt
$
39,756

 
$
64,004

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 borrowed $605.0 million and had approximately $14 million of outstanding letters of credit under the Revolving Credit Facility as of August 31, 2013. We repaid the entire amount borrowed under the Revolving Credit Facility during the first quarter of fiscal year 2014. As of May 31, 2014, we have approximately $24 million of outstanding letters of credit under the Revolving Credit Facility.

18

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 LIBOR + 125 to 185 basis points. The weighted average interest rate on outstanding short-term borrowings under the Revolving Credit Facility at August 31, 2013 was 3.5%.
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 a U.S. Department of Education financial responsibility composite score. We were in compliance with all applicable covenants related to the Revolving Credit Facility at May 31, 2014 and August 31, 2013.
Other debt principally includes debt at subsidiaries of Apollo Global and the present value of an obligation payable over a 10-year period associated with our purchase of technology in fiscal year 2012. The weighted average interest rate on our outstanding other debt at May 31, 2014 and August 31, 2013 was 5.8% and 5.3%, 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 determine our interim income tax provision by estimating our effective income tax rate expected to be applicable for the full fiscal year. 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.
Internal Revenue Service Audits
Our U.S. federal income tax return for fiscal year 2012 is currently under review by the Internal Revenue Service (“IRS”). In addition, we are participating in the IRS’s Compliance Assurance Process for fiscal year 2014, 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 U.S. federal income tax returns.
In the second quarter of fiscal year 2014, we executed a Closing Agreement with the IRS to settle a matter related to the deductibility of certain costs for our foreign subsidiaries in fiscal years 2011 through 2013, which resulted in a $10.2 million tax benefit during the nine months ended May 31, 2014. In addition, our fiscal year 2011 federal income tax return was closed in connection with this settlement. Based principally on these events, our unrecognized tax benefits decreased $19.7 million during the nine months ended May 31, 2014.
Other
In the second quarter of fiscal year 2014, Mexico enacted comprehensive tax reform legislation which, among other things, eliminated the flat rate business tax and modified the income tax exemption for educational companies. Based on this legislation, ULA is no longer subject to the flat rate business tax, and is now subject to income tax. Accordingly, we adjusted our deferred taxes associated with this jurisdiction in the second quarter of fiscal year 2014, which resulted in a $2.8 million tax benefit during the nine months ended May 31, 2014.
In addition to the IRS audits discussed above, we are subject to numerous ongoing audits by state, local and foreign tax authorities. 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 Apollo Education Group 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 $135.3 million remained available as of May 31, 2014. 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

19

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

applicable Securities and Exchange Commission rules, and may include repurchases pursuant to Securities and Exchange Commission Rule 10b5-1 nondiscretionary trading programs.
We also repurchase shares in connection with tax withholding requirements associated with the release of vested shares of restricted stock units, which do not fall under the repurchase program described above.
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)
2014
 
2013
 
2014
 
2013
Share repurchases under share repurchase program:
 
 
 
 
 
 
 
Number of shares repurchased
1,507

 

 
3,797

 

Weighted average purchase price per share
$
29.85

 
$

 
$
30.21

 
$

Cost of share repurchases
$
45,000

 
$

 
$
114,684

 
$

Share repurchases related to vesting of restricted stock units:
 
 
 
 
 
 
 
Number of shares repurchased
45

 
103

 
158

 
262

Cost of share repurchases
$
1,241

 
$
1,815

 
$
3,794

 
$
5,696

Share Reissuances
We reissue our Apollo Education Group Class A common stock from our treasury stock as a result of the release of shares covered by vested restricted stock units, stock option exercises 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)
2014
 
2013
 
2014
 
2013
Number of shares reissued
112

 
324

 
503

 
848

Purchase of Noncontrolling Interest in Apollo Global
The following details net income attributable to Apollo and transfers to noncontrolling interest during the respective periods:
 
Nine Months Ended
May 31,
($ in thousands)
2014
 
2013
Net income attributable to Apollo
$
179,521

 
$
226,975

Transfer to noncontrolling interest:
 
 
 
Decrease in equity for purchase of noncontrolling interest in Apollo Global(1)

 
(48,543
)
Change from net income attributable to Apollo and transfer to noncontrolling interest
$
179,521

 
$
178,432

(1) Represents the difference between the fair value of the consideration paid to purchase the noncontrolling ownership interest in Apollo Global and the carrying amount of the noncontrolling interest acquired, and an adjustment to accumulated other comprehensive loss to reflect the change in Apollo’s proportionate interest.
Redeemable Noncontrolling Interests
During the first nine months of fiscal year 2014, Apollo Global acquired an 81% consolidated interest in Milpark Education and 70% of the outstanding shares of Open Colleges. We also have the option to buy the remaining noncontrolling interests associated with these acquisitions, and the noncontrolling shareholders have the option to sell their shares to us. The options are exercisable in the third quarter of our fiscal year 2016 for Milpark Education and in early calendar 2017 for Open Colleges, or earlier in limited circumstances for both acquisitions. The price for the options is based on a formula specified at the respective acquisition dates and is principally based on a multiple of the respective acquired entity’s operating results as defined in the acquisition agreements. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the respective noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified both of the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets.
Both of the redeemable noncontrolling interests are probable of becoming redeemable. Accordingly, we record both redeemable noncontrolling interests at the greater of the carrying value or the redemption value at the end of each reporting period. We

20

APOLLO EDUCATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

determine the redemption value using the formula specified at each respective acquisition date, and by assuming the end of each reporting period is the redemption date. We record redemption value adjustments through retained earnings.
Note 13. Earnings Per Share
Our outstanding shares consist of Apollo Education Group Class A and Class B common stock. Our Articles of Incorporation treat the declaration of dividends on the Apollo Education Group Class A and Class B common stock in an identical manner. As such, both the Apollo Education Group 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)
2014
 
2013
 
2014
 
2013
Numerator: