APOL Apollo Education Grp., Inc.

Apollo Education Group, Inc. (NASDAQ: APOL) (“Apollo” or the “Company”) today reported financial results for the three months and fiscal year ended August 31, 2016, with fourth quarter revenue of $492.5 million and diluted earnings per share from continuing operations of $0.20, or $0.21 excluding special items.

“We operate in a challenging and competitive market, but we continue to execute on our strategic plan which is centered on achieving successful student outcomes,” said Greg Cappelli, Chief Executive Officer of Apollo Education Group. “During our fourth quarter, domestically, University of Phoenix made solid progress on its transformational plan, including student progression and satisfaction, new student enrollment trends, and a more efficient operating structure. Internationally, despite the impact of Brexit in the UK and other challenges, we continue to grow and now serve over 175,000 students at Apollo Global. At Apollo Education Group, we have worked to align our cost base with our enrollment levels, maintained a strong cash position, and continued our focus on improving efficiency to promote long-term organizational strength and the ability to reinvest. While we’re encouraged by our progress, we must sustain and build upon our current efforts in order to return to long-term growth.”

Fourth Quarter 2016 Results of Operations

Apollo Education Group reported net revenue for the fourth quarter 2016 of $492.5 million compared to $600.3 million for the fourth quarter 2015. Fourth quarter 2016 University of Phoenix New Degreed Enrollment was 19,400 and Degreed Enrollment was 142,500, compared to New Degreed Enrollment of 26,500 and Degreed Enrollment of 190,700 for the prior year fourth quarter. Operating income for the fourth quarter 2016 was $28.5 million, compared to an operating loss of $5.0 million for the fourth quarter 2015. Income from continuing operations attributable to Apollo Education Group for the fourth quarter 2016 was $22.3 million, or $0.20 per share, compared to a loss of $10.2 million, or $0.09 per share, for the prior year fourth quarter.

Excluding special items, income from continuing operations attributable to Apollo Education Group for the fourth quarter 2016 was $23.0 million, or $0.21 per share, compared to $18.7 million, or $0.17 per share, for the fourth quarter 2015. Adjusted EBITDA was $61.1 million for the fourth quarter 2016 compared to $54.1 million for the fourth 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.)

Fiscal Year 2016 Results of Operations

Net revenue for fiscal year 2016 totaled $2.1 billion, compared to $2.6 billion in fiscal year 2015. In fiscal year 2016, University of Phoenix Average Degreed Enrollment was 165,600, compared to 214,500 for the prior year period. Operating loss for fiscal year 2016 was $65.6 million compared to operating income of $114.9 million in the prior year period. Loss from continuing operations attributable to Apollo Education Group for fiscal year 2016 was $74.9 million, or $0.69 per share, compared to income of $52.9 million, or $0.49 per share, for fiscal year 2015.

Excluding special items, income from continuing operations attributable to Apollo Education Group for fiscal year 2016 was $63.3 million, or $0.58 per share, compared to $120.5 million, or $1.10 per share, for fiscal year 2015. Adjusted EBITDA was $222.0 million for fiscal year 2016 compared to $322.6 million for fiscal year 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 August 31, 2016, the Company’s unrestricted cash and cash equivalents and marketable securities (including current and noncurrent) totaled $680.7 million, compared to $794.2 million as of August 31, 2015. The decrease was primarily attributable to $97.3 million paid to acquire Career Partner GmbH and $73.1 million for capital expenditures, which was partially offset by $45.1 million of cash provided by operations.

Total debt outstanding (including short-term borrowings and the current portion of long-term debt) was $90.8 million as of August 31, 2016. Subsequent to August 31, 2016, the Company repaid the $30 million drawn on its principal revolving credit facility.

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 fourth quarter earnings press release.

About Apollo Education Group, Inc.

Apollo Education Group, Inc. is a private education provider 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 adults 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 EndedAugust 31,

Year EndedAugust 31,

(In thousands, except per share data) 2016     2015 2016     2015 Net revenue $ 492,479 $ 600,291 $ 2,101,850 $ 2,566,277 Costs and expenses: Instructional and student advisory 260,702 300,187 1,097,155 1,207,535 Marketing 75,629 118,639 354,757 487,759 Admissions advisory 28,162 41,849 122,662 209,768 General and administrative 53,857 67,447 246,157 273,662 Depreciation and amortization 27,460 29,598 109,938 125,303 Provision for uncollectible accounts receivable 12,070 16,833 55,882 59,205 Restructuring and impairment charges 9,479 29,078 159,057 81,800 Merger, acquisition and other related (credits) costs, net (3,353 ) 1,695 21,835 6,201 Litigation charge —   —   —   100   Total costs and expenses 464,006   605,326   2,167,443   2,451,333   Operating income (loss) 28,473 (5,035 ) (65,593 ) 114,944 Interest income 1,134 959 4,017 3,050 Interest expense (1,725 ) (1,479 ) (6,722 ) (6,595 ) Other loss, net (983 ) (1,276 ) (3,212 ) (5,756 ) Income (loss) from continuing operations before income taxes 26,899 (6,831 ) (71,510 ) 105,643 Provision for income taxes (6,033 ) (4,366 ) (9,829 ) (58,163 ) Income (loss) from continuing operations 20,866 (11,197 ) (81,339 ) 47,480 Loss from discontinued operations, net of tax (6,432 ) (8,279 ) (9,691 ) (23,185 ) Net income (loss) 14,434 (19,476 ) (91,030 ) 24,295 Net loss attributable to noncontrolling interests 1,429   992   6,476   5,460   Net income (loss) attributable to Apollo $ 15,863   $ (18,484 ) $ (84,554 ) $ 29,755   Earnings (loss) per share - Basic: Continuing operations attributable to Apollo $ 0.20 $ (0.09 ) $ (0.69 ) $ 0.49 Discontinued operations attributable to Apollo (0.05 ) (0.08 ) (0.09 ) (0.21 ) Basic income (loss) per share attributable to Apollo $ 0.15   $ (0.17 ) $ (0.78 ) $ 0.28   Earnings (loss) per share - Diluted: Continuing operations attributable to Apollo $ 0.20 $ (0.09 ) $ (0.69 ) $ 0.49 Discontinued operations attributable to Apollo (0.06 ) (0.08 ) (0.09 ) (0.22 ) Diluted income (loss) per share attributable to Apollo $ 0.14   $ (0.17 ) $ (0.78 ) $ 0.27   Basic weighted average shares outstanding 108,939 107,950 108,660 108,092 Diluted weighted average shares outstanding 110,269 107,950 108,660 109,038    

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

  As of August 31, ($ in thousands) 2016     2015 ASSETS Current assets: Cash and cash equivalents $ 464,024 $ 503,705 Restricted cash and cash equivalents 142,170 198,369 Marketable securities 197,886 194,676 Accounts receivable, net 224,990 198,459 Prepaid taxes 19,287 38,371 Other current assets 40,368 48,823 Assets of business held for sale —   40,897   Total current assets 1,088,725 1,223,300 Marketable securities 18,758 95,815 Property and equipment, net 332,702 370,281 Goodwill 272,699 247,190 Intangible assets, net 191,146 143,244 Deferred taxes 78,366 92,105 Other assets 30,510   29,129   Total assets $ 2,012,906   $ 2,201,064   LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 55,609 $ 14,080 Accounts payable 59,640 64,100 Student deposits 178,160 245,470 Current deferred revenue 188,092 186,950 Accrued and other current liabilities 233,976 280,847 Liabilities of business held for sale —   40,897   Total current liabilities 715,477 832,344 Long-term debt 35,186 31,566 Deferred taxes 16,323 7,729 Other long-term liabilities 169,326   172,452   Total liabilities 936,312 1,044,091 Commitments and contingencies Redeemable noncontrolling interests 5,860 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 (3,868,341 ) (3,928,419 ) Retained earnings 5,024,528 5,153,452 Accumulated other comprehensive loss (85,957 ) (80,579 ) Total Apollo shareholders’ equity 1,070,334 1,144,558 Noncontrolling interests 400   500   Total equity 1,070,734   1,145,058   Total liabilities, redeemable noncontrolling interests and shareholders’ equity $ 2,012,906   $ 2,201,064      

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

Year EndedAugust 31,

($ in thousands) 2016     2015 Operating activities: Net (loss) income $ (91,030 ) $ 24,295 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Share-based compensation 32,862 38,669 Excess tax benefits from share-based compensation — (236 ) Depreciation and amortization 109,938 132,012 Accelerated depreciation included in restructuring 15,792 12,818 Impairment charges and losses on asset dispositions 77,578 39,776 Non-cash foreign currency (gain) loss, net (175 ) 2,389 Provision for uncollectible accounts receivable 55,882 59,205 Deferred income taxes 1,095 2,752 Changes in assets and liabilities, excluding the impact of acquisitions and disposition: Restricted cash and cash equivalents 57,481 25,150 Accounts receivable (85,672 ) (74,475 ) Prepaid taxes 18,398 (4,352 ) Other assets 13,314 12,866 Accounts payable (5,482 ) 1,994 Student deposits (65,804 ) (32,298 ) Current deferred revenue (25,681 ) 6,985 Accrued and other liabilities (63,412 ) (78,968 ) Net cash provided by operating activities 45,084 168,582 Investing activities: Purchases of property and equipment (73,074 ) (97,961 ) Purchases of marketable securities (250,509 ) (232,700 ) Maturities of marketable securities 246,212 141,974 Sales of marketable securities 73,102 70,719 Acquisitions, net of cash acquired (97,277 ) (31,705 ) Other investing activities (3,440 ) (4,628 ) Net cash used in investing activities (104,986 ) (154,301 ) Financing activities: Payments on borrowings (66,224 ) (614,735 ) Proceeds from borrowings 86,961 5,800 Share repurchases (4,454 ) (44,723 ) Share reissuances 1,174 1,538 Purchase of noncontrolling interests — (51,485 ) Excess tax benefits from share-based compensation — 236 Payment for contingent consideration —   (21,371 ) Net cash provided by (used in) financing activities 17,457 (724,740 ) Effect of foreign exchange rates on cash and cash equivalents 2,764   (4,429 ) Net decrease in cash and cash equivalents (39,681 ) (714,888 ) Cash and cash equivalents, beginning of year 503,705   1,228,813   Cash and cash equivalents and cash of business held for sale, end of year 464,024 513,925 Less cash of business held for sale —   (10,220 ) Cash and cash equivalents, end of year $ 464,024   $ 503,705   Supplemental disclosure of cash flow and non-cash information: Cash paid for income taxes, net of refunds $ 83 $ 47,836 Cash paid for interest 6,755 6,674 Restricted stock units vested and released 13,885 19,570 Credits received for tenant improvements 3,312 —        

Apollo Education Group, Inc. and Subsidiaries

Segment Data and University of Phoenix Operating Metrics

(Unaudited)

 

Three Months EndedAugust 31,

Year EndedAugust 31,

($ in thousands) 2016     2015 2016     2015 Net revenue: University of Phoenix: Degree seeking gross revenues(1) $ 419,491 $ 568,515 $ 1,832,128 $ 2,393,769 Less: Discounts and other (51,931 ) (74,788 ) (240,672 ) (294,103 ) Degree seeking net revenues(1) 367,560 493,727 1,591,456 2,099,666 Other revenues 11,800   13,271   39,956   48,646   Total University of Phoenix 379,360 506,998 1,631,412 2,148,312 Apollo Global 99,565 85,355 433,700 391,217 Other 13,554   7,938   36,738   26,748   Net revenue $ 492,479   $ 600,291   $ 2,101,850   $ 2,566,277   Operating income (loss): University of Phoenix $ 47,127 $ 40,589 $ 80,226 $ 257,366 Apollo Global (8,218 ) (22,609 ) (37,895 ) (49,527 ) Other (10,436 ) (23,015 ) (107,924 ) (92,895 ) Operating income (loss) $ 28,473   $ (5,035 ) $ (65,593 ) $ 114,944   (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 August 31,         Year Ended August 31, 2016   2015  

%Change

2016   2015  

%Change

Degreed Enrollment(1), (2) 142,500 190,700 (25.3 )% Average Degreed Enrollment(2), (4) 165,600 214,500 (22.8 )% New Degreed Enrollment(3) 19,400 26,500 (26.8 )% Aggregate New Degreed Enrollment 79,000 123,800 (36.2 )% Degree seeking net revenues per degreed enrollment $ 2,579 $ 2,589 (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 and fourth quarters of fiscal year 2016 compared to prior periods 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 for both the third and fourth quarters of fiscal year 2016. (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 EndedAugust 31,

Year EndedAugust 31,

(In thousands, except per share data) 2016     2015 2016     2015 Net income (loss) attributable to Apollo, as reported $ 15,863 $ (18,484 ) $ (84,554 ) $ 29,755 Less: Loss from discontinued operations, net of tax (6,432 ) (8,279 ) (9,691 ) (23,185 ) Income (loss) from continuing operations attributable to Apollo 22,295 (10,205 ) (74,863 ) 52,940 Special items: Restructuring and impairment charges(1) 9,479 29,078 159,057 81,800 Merger, acquisition and other related (credits) costs, net (3,353 ) 1,695 21,835 6,201 Litigation charge —   —   —   100   Special items before income taxes 6,126 30,773 180,892 88,101 Less: income tax effects of special items (5,444 ) (11,921 ) (42,706 ) (33,669 ) Open Colleges valuation allowance charge — 10,082 — 10,082 Tax expense from resolution with tax authority —   —   —   3,002   Special items, net of income taxes 682   28,934   138,186   67,516   Income from continuing operations attributable to Apollo, excluding special items $ 22,977   $ 18,729   $ 63,323   $ 120,456   Diluted income (loss) per share from continuing operations attributable to Apollo, as reported $ 0.20 $ (0.09 ) $ (0.69 ) $ 0.49 Diluted income per share from continuing operations attributable to Apollo, excluding special items $ 0.21 $ 0.17 $ 0.58 $ 1.10

(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 EndedAugust 31,

Year EndedAugust 31,

($ in thousands) 2016     2015 2016     2015 Adjusted EBITDA: University of Phoenix $ 69,395 $ 76,384 $ 274,740 $ 392,370 Apollo Global 842 (16,055 ) 3,063 (15,284 ) Other (9,161 ) (6,269 ) (55,778 ) (54,494 ) Adjusted EBITDA 61,076 54,060 222,025 322,592 Less: Special items before income taxes (see above table) 6,126 30,773 180,892 88,101 Less: Depreciation and amortization 27,460 29,598 109,938 125,303 Less: Interest expense, net of interest income 591 520 2,705 3,545 Less: Provision for income taxes 6,033 4,366 9,829 58,163 Plus: Loss from discontinued operations, net of tax (6,432 ) (8,279 ) (9,691 ) (23,185 ) Net income (loss), as reported $ 14,434   $ (19,476 ) $ (91,030 ) $ 24,295    

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 impact of the U.S. Department of Education gainful employment regulations on University of Phoenix enrollment and the associated expenses we may incur in connection with any programs rendered ineligible to participate in Title IV programs; (x) the inability to retain key personnel of Apollo Education Group or its subsidiaries; (xi) 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; (xii) 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; (xiii) diversion of management’s attention from ongoing business concerns; (xiv) limitations placed on Apollo Education Group’s ability to operate its business by the merger agreement; (xv) the impact of increased competition from traditional public universities and proprietary educational institutions; (xvi) 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; (xvii) the impact of Apollo Education Group’s ongoing restructuring and cost-reduction initiatives; (xviii) 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; (xix) 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; (xx) 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; (xxi) changes in regulation of the U.S. education industry and eligibility of proprietary schools to participate in U.S. Federal student financial aid programs, including without limitation the proposed regulations governing discharge of student loans and requirements for state authorization; (xxii) changes in University of Phoenix’s enrollment or student mix; (xxiii) the impact on student enrollments of the announcement of the proposed merger and general economic conditions; (xxiv) the impact of third party claims that Apollo Education Group’s products and services infringe their intellectual property rights; and (xxv) fluctuations in non-U.S. currencies that could impact reported operating results of foreign subsidiaries, including the recent significant fluctuations in the British pound sterling associated with the U.K. referendum to exit the European Union. 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 2016, filed with the Securities and Exchange Commission (the “SEC”) on October 20, 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