APOLLO EDUCATION GROUP INC - 10-Q filing on 2016-07-08

Restructuring and Impairment Charges

9 Months Ended

May 31, 2016

Restructuring and Related Activities [Abstract]

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

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⁾			Total
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.

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.