APOL Apollo Education Grp., Inc.

Apollo Education Group, Inc. (NASDAQ: APOL) (“Apollo” or the “Company”) today reported financial results for the three and nine months ended May 31, 2016, with third quarter revenue of $558.0 million and diluted earnings per share from continuing operations of $0.19, or $0.37 excluding special items.

“We remain committed to our transformational plan at University of Phoenix, which we believe will result in a higher retaining and more focused and trusted university,” said Greg Cappelli, Chief Executive Officer of Apollo Education Group. “We also continue to grow internationally through Apollo Global where we serve more than 150,000 students on six continents. While we have significantly reduced the cost base of the company, we will continue to look for additional efficiencies, as necessary, in order to support our long-term strategic plan.”

Third Quarter 2016 Results of Operations

Apollo Education Group reported net revenue for the third quarter 2016 of $558.0 million compared to $676.4 million for the third quarter 2015. Third quarter 2016 University of Phoenix New Degreed Enrollment was 17,900 and Degreed Enrollment was 155,600, compared to New Degreed Enrollment of 29,400 and Degreed Enrollment of 206,900 for the prior year third quarter. Operating income for the third quarter 2016 was $32.0 million, compared to $93.3 million for the third quarter 2015. Income from continuing operations attributable to Apollo Education Group for the third quarter 2016 was $20.7 million, or $0.19 per share, compared to $50.3 million, or $0.46 per share, for the prior year third quarter.

Excluding special items, income from continuing operations attributable to Apollo Education Group for the third quarter 2016 was $40.5 million, or $0.37 per share, compared to $59.7 million, or $0.55 per share, for the third quarter 2015. Adjusted EBITDA was $90.7 million for the third quarter 2016 compared to $132.2 million for the third quarter 2015. (Special items and Adjusted EBITDA for the respective periods are included in the reconciliation of GAAP to non-GAAP financial information tables of this press release.)

First Nine Months of 2016 Results of Operations

Net revenue for the first nine months of fiscal year 2016 totaled $1.6 billion, compared to $2.0 billion in the first nine months of fiscal year 2015. In the first nine months of 2016, University of Phoenix Average Degreed Enrollment was 171,400, compared to 220,400 for the prior year period. Operating loss for the first nine months of 2016 was $94.1 million compared to operating income of $120.0 million in the prior year period. Loss from continuing operations attributable to Apollo Education Group for the first nine months of 2016 was $97.2 million, or $0.89 per share, compared to income of $63.1 million, or $0.58 per share, for the first nine months of 2015.

Excluding special items, income from continuing operations attributable to Apollo Education Group for the first nine months of fiscal year 2016 was $40.3 million, or $0.37 per share, compared to $101.7 million, or $0.93 per share, for the first nine months of 2015. Adjusted EBITDA was $160.9 million for the first nine months of 2016 compared to $268.5 million for the first nine months of 2015. (Special items and Adjusted EBITDA for the respective periods are included in the reconciliation of GAAP to non-GAAP financial information tables of this press release.)

Balance Sheet and Cash Flow

As of May 31, 2016, the Company’s unrestricted cash and cash equivalents and marketable securities (including current and noncurrent) totaled $643.2 million, compared to $794.2 million as of August 31, 2015. The decrease was primarily attributable to $101.2 million paid to acquire Career Partner GmbH and capital expenditures.

Total debt outstanding (including short-term borrowings and the current portion of long-term debt) was $62.1 million as of May 31, 2016.

Business Outlook

Due to the pending merger transaction announced February 8, 2016, the Company is not providing an updated financial outlook at this time.

Conference Call Information

In light of the pending merger, the Company will not be hosting an investor conference call following the issuance of its fiscal year 2016 third quarter earnings press release.

About Apollo Education Group, Inc.

Apollo Education Group, Inc. is one of the world’s largest private education providers, serving students since 1973. Through its subsidiaries, Apollo Education Group offers undergraduate, graduate, certificate and nondegree educational programs and services, online and on-campus, principally to working learners in the U.S. and abroad. For more information about Apollo Education Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company’s website at www.apollo.edu.

 

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

       

Three Months EndedMay 31,

  Nine Months EndedMay 31, (In thousands, except per share data) 2016   2015 2016   2015 Net revenue $ 558,002 $ 676,358 $ 1,609,371 $ 1,965,986 Costs and expenses: Instructional and student advisory 274,486 294,841 836,453 907,348 Marketing 87,530 116,839 279,128 369,120 Admissions advisory 30,192 52,994 94,500 167,919 General and administrative 59,066 64,437 192,300 206,215 Depreciation and amortization 28,330 29,969 82,478 95,705 Provision for uncollectible accounts receivable 15,716 13,005 43,812 42,372 Restructuring and impairment charges 22,366 11,444 149,578 52,722 Merger, acquisition and other related costs (credit), net 8,317 (455 ) 25,188 4,506 Litigation charge —   —   —   100   Total costs and expenses 526,003   583,074   1,703,437   1,846,007   Operating income (loss) 31,999 93,284 (94,066 ) 119,979 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 Provision for income taxes (11,399 ) (40,667 ) (3,796 ) (53,797 ) Income (loss) from continuing operations 19,799 49,626 (102,205 ) 58,677 Loss from discontinued operations, net of tax —   (2,186 ) (3,259 ) (14,906 ) Net income (loss) 19,799 47,440 (105,464 ) 43,771 Net loss attributable to noncontrolling interests 945   624   5,047   4,468   Net income (loss) attributable to Apollo $ 20,744   $ 48,064   $ (100,417 ) $ 48,239   Earnings (loss) per share - Basic: Continuing operations attributable to Apollo $ 0.19 $ 0.47 $ (0.89 ) $ 0.59 Discontinued operations attributable to Apollo —   (0.02 ) (0.03 ) (0.14 ) Basic income (loss) per share attributable to Apollo $ 0.19   $ 0.45   $ (0.92 ) $ 0.45   Earnings (loss) per share - Diluted: Continuing operations attributable to Apollo $ 0.19 $ 0.46 $ (0.89 ) $ 0.58 Discontinued operations attributable to Apollo —   (0.02 ) (0.03 ) (0.14 ) Diluted income (loss) per share attributable to Apollo $ 0.19   $ 0.44   $ (0.92 ) $ 0.44   Basic weighted average shares outstanding 108,658 107,678 108,567 108,140 Diluted weighted average shares outstanding 109,444 108,623 108,567 109,124  

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

        As of ($ in thousands) May 31, 2016   August 31, 2015 ASSETS Current assets: Cash and cash equivalents $ 361,526 $ 503,705 Restricted cash and cash equivalents 185,320 198,369 Marketable securities 242,301 194,676 Accounts receivable, net 193,477 198,459 Prepaid taxes 29,165 38,371 Other current assets 53,201 48,823 Assets of business held for sale —   40,897   Total current assets 1,064,990 1,223,300 Marketable securities 39,323 95,815 Property and equipment, net 343,094 370,281 Goodwill 265,765 247,190 Intangible assets, net 200,756 143,244 Deferred taxes 93,772 92,105 Other assets 29,926   29,129   Total assets $ 2,037,626   $ 2,201,064   LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 19,514 $ 14,080 Accounts payable 56,297 64,100 Student deposits 213,986 245,470 Deferred revenue 185,025 186,950 Accrued and other current liabilities 248,863 280,847 Liabilities of business held for sale —   40,897   Total current liabilities 723,685 832,344 Long-term debt 42,597 31,566 Deferred taxes 16,924 7,729 Other long-term liabilities 182,491   172,452   Total liabilities 965,697 1,044,091 Commitments and contingencies Redeemable noncontrolling interests 7,204 11,915 Shareholders’ equity: Preferred stock, no par value — — Apollo Class A nonvoting common stock, no par value 103 103 Apollo Class B voting common stock, no par value 1 1 Additional paid-in capital — — Apollo Class A treasury stock, at cost (3,915,279 ) (3,928,419 ) Retained earnings 5,061,631 5,153,452 Accumulated other comprehensive loss (82,286 ) (80,579 ) Total Apollo shareholders’ equity 1,064,170 1,144,558 Noncontrolling interests 555   500   Total equity 1,064,725   1,145,058   Total liabilities, redeemable noncontrolling interests and shareholders’ equity $ 2,037,626   $ 2,201,064    

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

        Nine Months Ended

May 31,

($ in thousands) 2016   2015 Operating activities: Net (loss) income $ (105,464 ) $ 43,771 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Share-based compensation 27,318 29,768 Excess tax benefits from share-based compensation — (236 ) Depreciation and amortization 82,478 101,779 Accelerated depreciation included in restructuring 12,262 7,207 Impairment charges and loss on asset dispositions 76,470 22,228 Non-cash foreign currency loss, net 492 1,722 Provision for uncollectible accounts receivable 43,812 42,372 Deferred income taxes (6,175 ) (12,471 ) Changes in assets and liabilities, excluding the impact of acquisitions: Restricted cash and cash equivalents 13,567 5,529 Accounts receivable (37,296 ) (51,555 ) Prepaid taxes 8,104 21,038 Other assets (684 ) (1,974 ) Accounts payable (8,872 ) 7,753 Student deposits (32,002 ) (25,918 ) Deferred revenue (28,564 ) 22,677 Accrued and other liabilities (35,813 ) (89,987 ) Net cash provided by operating activities 9,633 123,703 Investing activities: Purchases of property and equipment (51,414 ) (74,254 ) Purchases of marketable securities (203,504 ) (156,465 ) Maturities and sales of marketable securities 208,360 156,337 Acquisitions, net of cash acquired (101,196 ) (21,166 ) Other investing activities (727 ) (14,216 ) Net cash used in investing activities (148,481 ) (109,764 ) Financing activities: Payments on borrowings (63,785 ) (605,214 ) Proceeds from borrowings 56,961 4,515 Share repurchases (732 ) (40,700 ) Share reissuances 638 995 Excess tax benefits from share-based compensation — 236 Payment for contingent consideration —   (21,371 ) Net cash used in financing activities (6,918 ) (661,539 ) Exchange rate effect on cash and cash equivalents 3,587   (3,991 ) Net decrease in cash and cash equivalents (142,179 ) (651,591 ) Cash and cash equivalents, beginning of period 503,705   1,228,813   Cash and cash equivalents, end of period $ 361,526   $ 577,222   Supplemental disclosure of cash flow and non-cash information: Cash paid for income taxes, net of refunds $ 1,144 $ 36,545 Cash paid for interest 5,081 5,134 Restricted stock units vested and released 2,083 7,407  

Apollo Education Group, Inc. and Subsidiaries

Segment Data and University of Phoenix Operating Metrics

(Unaudited)

        Three Months Ended

May 31,

  Nine Months Ended

May 31,

($ in thousands) 2016   2015 2016   2015 Net revenue: University of Phoenix: Degree seeking gross revenues(1) $ 474,749 $ 625,949 $ 1,412,637 $ 1,825,254 Less: Discounts and other (61,010 ) (79,362 ) (188,741 ) (219,315 ) Degree seeking net revenues(1) 413,739 546,587 1,223,896 1,605,939 Other revenues 10,740   14,105   28,156   35,375   Total 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): University of Phoenix $ 59,681 $ 103,395 $ 33,099 $ 216,776 Apollo Global (459 ) 5,465 (29,677 ) (26,918 ) Other (27,223 ) (15,576 ) (97,488 ) (69,879 ) Operating income (loss) $ 31,999   $ 93,284   $ (94,066 ) $ 119,979  

 

(1) Represents revenue from tuition and other fees for students enrolled in University of Phoenix degree programs or certificate programs of at least 18 credits in length with some course applicability into a related degree program.

  University of Phoenix Enrollment Data:              

(Rounded to the nearest hundred, except per degreed enrollment)

Three Months Ended May 31, Nine Months Ended May 31, 2016   2015  

%Change

2016   2015  

%Change

Degreed Enrollment(1), (2) 155,600 206,900 (24.8 )% Average Degreed Enrollment(2), (4) 171,400 220,400 (22.2 )% New Degreed Enrollment(3) 17,900 29,400 (39.1 )% Aggregate New Degreed Enrollment 59,600 97,300 (38.7 )%

Degree seeking net revenuesper degreed enrollment

$ 2,659 $ 2,642

 

(1) Represents students enrolled in a degree program who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter; students who previously graduated from one degree program and started a new degree program in the quarter (e.g., a graduate of an associate’s degree program returns for a bachelor’s degree); and students participating in certain certificate programs of at least 18 credits with some course applicability into a related degree program.

(2) As described in Footnote 1, Degreed Enrollment includes students who attended a credit bearing course during the quarter and had not graduated as of the end of the quarter. The proportion of students included in Degreed Enrollment who have completed their academic work but not yet formally graduated (“academically complete students”) increased during the third quarter of fiscal year 2016 compared to the prior year period due to changes in the manner in which graduation applications are processed. We estimate that the number of academically complete students reflected in this increase is approximately 2,000 - 3,000.

(3) Represents new students and students who have been out of attendance for more than 12 months who enroll in a degree program and start a credit bearing course in the quarter; students who have previously graduated from a degree program and start a new degree program in the quarter; and students who commence participation in certain certificate programs of at least 18 credits with some course applicability into a related degree program.

(4) Represents the average of quarterly Degreed Enrollment from the beginning to the end of the respective periods.

 

Apollo Education Group, Inc. and Subsidiaries

Reconciliation of GAAP Financial Information to Non-GAAP Financial Information

(Unaudited)

        Three Months Ended

May 31,

  Nine Months Ended

May 31,

(In thousands, except per share data) 2016   2015 2016   2015 Net income (loss) attributable to Apollo, as reported $ 20,744 $ 48,064 $ (100,417 ) $ 48,239 Less: Loss from discontinued operations, net of tax —   (2,186 ) (3,259 ) (14,906 ) Income (loss) from continuing operations attributable to Apollo 20,744 50,250 (97,158 ) 63,145 Special items: Restructuring and impairment charges(1) 22,366 11,444 149,578 52,722 Merger, acquisition and other related costs (credit), net 8,317 (455 ) 25,188 4,506 Litigation charge —   —   —   100   Special items before income taxes 30,683 10,989 174,766 57,328 Less: income tax effects of special items (10,972 ) (4,532 ) (37,262 ) (21,747 ) Tax expense from resolution with tax authority —   3,002   —   3,002   Special items, net of income taxes 19,711   9,459   137,504   38,583   Income from continuing operations attributable to Apollo, excluding special items $ 40,455   $ 59,709   $ 40,346   $ 101,728   Diluted income (loss) per share from continuing operations attributable to Apollo, as reported $ 0.19 $ 0.46 $ (0.89 ) $ 0.58 Diluted income per share from continuing operations attributable to Apollo, excluding special items $ 0.37 $ 0.55 $ 0.37 $ 0.93

 

(1) During the first quarter of fiscal year 2016, we recorded $73.4 million of goodwill impairment charges.

 

Reconciliation of Adjusted EBITDA to Net Income (Loss)

        Three Months Ended

May 31,

  Nine Months Ended

May 31,

($ in thousands) 2016   2015 2016   2015 Adjusted EBITDA: University of Phoenix $ 93,326 $ 129,644 $ 205,345 $ 315,986 Apollo Global 11,374 12,481 2,221 771 Other (13,961 ) (9,921 ) (46,617 ) (48,225 ) Adjusted EBITDA 90,739 132,204 160,949 268,532 Less: Special items before income taxes (see above table) 30,683 10,989 174,766 57,328 Less: Depreciation and amortization 28,330 29,969 82,478 95,705 Less: Interest expense, net of interest income 528 953 2,114 3,025 Less: Provision for income taxes 11,399 40,667 3,796 53,797 Plus: Loss from discontinued operations, net of tax —   (2,186 ) (3,259 ) (14,906 ) Net income (loss), as reported $ 19,799   $ 47,440   $ (105,464 ) $ 43,771  

Use of Non-GAAP Financial Information

The Company’s non-GAAP financial measures are intended to supplement, but not substitute for, the most directly comparable GAAP measures. Management uses, and chooses to disclose to investors, these non-GAAP financial measures because: (i) such measures provide an additional analytical tool to clarify the Company’s results from operations and help to identify underlying trends in its results of operations; (ii) as to the non-GAAP earnings measures, such measures help compare the Company’s performance on a consistent basis across time periods; and (iii) these non-GAAP measures are employed by the Company’s management in its own evaluation of performance and are utilized in financial and operational decision-making processes, such as budgeting and forecasting. Exclusion of items in the non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. Other companies, including other companies in the education industry, may calculate non-GAAP financial measures differently, limiting their usefulness as a comparative measure across companies.

“Adjusted EBITDA” is earnings from continuing operations before interest expense and interest income, income taxes, depreciation and amortization, and special items. It is intended to provide an indicator of our operating performance across time periods.

Forward-Looking Statements Safe Harbor

Statements about Apollo Education Group and its business in this release which are not statements of historical fact, including statements regarding Apollo Education Group’s future strategy and plans and commentary regarding future results of operations and prospects, are forward-looking statements and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual plans implemented and actual results achieved may differ materially from those set forth in or implied by such statements due to various factors, including, without limitation: (i) the timing of the completion of the previously announced pending merger transaction 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, an entity unrelated to Apollo Education Group; (ii) the inability to complete the merger due to the failure to satisfy customary and other conditions to completion of the merger, including receipt of required regulatory approvals; (iii) the risk that regulatory agencies impose restrictions, limitations, costs, divestitures or other conditions in connection with providing regulatory approval of the merger; (iv) the outcome of pending or potential litigation or governmental investigations; (v) disruptions resulting from the proposed merger making it more difficult for Apollo Education Group to maintain relationships with its students, customers, employees, suppliers and strategic partners; (vi) competitive responses to the proposed merger; (vii) unexpected costs, liabilities, charges or expenses resulting from the merger; (viii) the inability to obtain, renew or modify permits in a timely manner, or comply with government regulations; (ix) the inability to retain key personnel of Apollo Education Group or its subsidiaries; (x) the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement, including a termination of the merger agreement under circumstances that could require Apollo Education Group to pay a termination fee; (xi) unexpected expenses or other challenges in integrating acquired businesses, student, consumer or regulatory impact arising from consummation of such acquisitions, and unexpected changes or developments in the acquired businesses; (xii) diversion of management’s attention from ongoing business concerns; (xiii) limitations placed on Apollo Education Group’s ability to operate its business by the merger agreement; (xiv) the impact of increased competition from traditional public universities and proprietary educational institutions; (xv) the impact of the initiatives to transform University of Phoenix into a more-focused, higher-retaining and less-complex institution, including the near-term impact on enrollment; (xvi) the impact of Apollo Education Group’s ongoing restructuring and cost-reduction initiatives; (xvii) impacts from actions taken by our regulators that could affect University of Phoenix’s eligibility to participate in or the manner in which it participates in U.S. Federal and state student financial aid programs, including the recent requirement that all substantial changes be approved by the U.S. Department of Education in advance; (xviii) further delay in University of Phoenix’s pending recertification by the U.S. Department of Education for participation in Title IV student financial aid programs, or any limitations or qualifications imposed in connection with any recertification; (xix) the impact of any reduction in financial aid available to students, including active and retired military personnel, due to the U.S. government deficit reduction proposals, debt ceiling limitations, budget sequestration or otherwise; (xx) changes in regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. Federal student financial aid programs; (xxi) changes in University of Phoenix’s enrollment or student mix; (xxii) the impact on student enrollments of the announcement of the proposed merger and general economic conditions; (xxiii) the impact of third party claims that Apollo Education Group’s products and services infringe their intellectual property rights; and (xxiv) fluctuations in non-U.S. currencies that could impact reported operating results of foreign subsidiaries. For a discussion of the various factors that may cause actual plans implemented and actual results achieved to differ materially from those set forth in the forward-looking statements, please refer to the risk factors and other disclosures contained in Apollo Education Group’s Form 10-K for fiscal year 2015, filed with the Securities and Exchange Commission (the “SEC”) on October 22, 2015, Form 10-Q for the quarterly period ended May 31, 2016, filed with the SEC on July 7, 2016, and other filings with the SEC which are available at www.apollo.edu. 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 Apollo Education Group or persons acting on Apollo Education Group’s behalf. Apollo Education Group undertakes 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, Apollo Education Group cannot guarantee future results, events, levels of activity, performance, or achievements.

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Apollo Education Group, Inc.Investor Relations Contact:Beth Coronelli, 312-660-2059beth.coronelli@apollo.eduMedia Contact:Media Relations Hotline, 602-254-0086media@apollo.edu