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Press release from Business Wire

Apollo Education Group, Inc. Reports Third Quarter 2014 Results

Wednesday, June 25, 2014

Apollo Education Group, Inc. Reports Third Quarter 2014 Results

07:30 EDT Wednesday, June 25, 2014

PHOENIX (Business Wire) -- Apollo Education Group, Inc. (NASDAQ: APOL) today reported financial results for the three and nine months ended May 31, 2014, with third quarter revenue of $799.9 million and diluted earnings per share of $0.59, or $0.76 excluding special items.

“We have made meaningful progress on our strategy to differentiate University of Phoenix and all of our institutions, diversify Apollo Education Group, and build a more efficient organization focused on operational excellence,” said Greg Cappelli, Chief Executive Officer, Apollo Education Group. “During the third quarter, we continued our plan to realign the University of Phoenix by implementing our college-based strategy and also completed the rollout of our new learning platform across the university. We further expanded our global network to South Africa and are now serving students on six continents through Apollo Global. Our teams are helping students ensure their education is linked to careers in growing areas and are working with employers to address their needs for access to high-quality talent with the most relevant job skills.”

“After a comprehensive national search, we are honored to have Tim Slottow in place as the new president of University of Phoenix, joining us from one of the world's most respected higher education institutions,” Cappelli added. “Tim shares our commitment to the mission of University of Phoenix, and to delivering a quality education that helps students achieve academic and personal success to meet their individual and professional goals.”

Third Quarter 2014 Results of Operations

Apollo Education Group (“the Company”) reported net revenue for the third quarter 2014 of $799.9 million, compared to $946.8 million for the third quarter 2013. As University of Phoenix continued to realign its operations during the third quarter 2014, University of Phoenix New Degreed Enrollment decreased 12.9% to 33,900 and Degreed Enrollment decreased 15.9% to 241,900, compared to the same period a year ago. Operating income for the third quarter 2014 was $113.1 million, compared to $132.0 million from the prior year third quarter. Net income attributable to Apollo Education Group for the third quarter 2014 was $66.0 million, or $0.59 per share, compared to $80.0 million, or $0.71 per share, in the third quarter 2013.

Results for the third quarter 2014 included the following special items: $16.2 million of contingent consideration charges and acquisition costs, $14.9 million of restructuring and other charges, a $4.1 million charge associated with legal matters, and an $11.2 million gain related to foreign indirect taxes following resolution with a taxing authority, which is included in the Instructional and Student Advisory line item.

Excluding these special items, operating income was $137.1 million for the third quarter 2014, compared to $195.1 million in the third quarter 2013, and net income attributable to Apollo Education Group for the third quarter 2014 was $84.9 million, or $0.76 per share, compared to $119.1 million, or $1.05 per share, for the third quarter 2013. (See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release for the third quarter 2014 and 2013 special items.)

First Nine Months of 2014 Results of Operations

Net revenue for the first nine months of fiscal year 2014 totaled $2.3 billion, compared to $2.8 billion in the first nine months of fiscal year 2013, representing a 17.7% decrease. In the first nine months of 2014, University of Phoenix Average Degreed Enrollment decreased 17.1% to 256,100 as compared to the same period a year ago. Operating income for the first nine months of 2014 was $290.0 million, compared to $392.7 million for same prior year period. The Company reported net income attributable to Apollo Education Group for the nine months ended May 31, 2014, of $179.5 million, or $1.59 per share, compared to $227.0 million, or $2.01 per share, for the nine months ended May 31, 2013.

Results for the first nine months of fiscal year 2014 included the following special items: $62.1 million of restructuring and other charges, $29.2 million of contingent consideration charges and acquisition costs, and a $13.1 million charge associated with legal matters, an $11.2 million gain related to foreign indirect taxes following resolution with a taxing authority, and a $10.2 million benefit from a tax settlement.

Excluding these special items noted above, operating income was $383.2 million for the nine months ended May 31, 2014, compared to $500.8 million for the nine months ended May 31, 2013, and net income attributable to Apollo Education Group for the nine months ended May 31, 2014, was $235.7 million, or $2.08 per share, compared to $295.0 million, or $2.61 per share, for the nine months ended May 31, 2013. (See the reconciliation of GAAP financial information to non-GAAP financial information in the tables section of this press release for the first nine months of 2014 and 2013 special items.)

Balance Sheet and Cash Flow

As of May 31, 2014, the Company's unrestricted cash and cash equivalents and short-term marketable securities were $800 million, compared to $1.5 billion at August 31, 2013. The decrease was primarily due to $623.3 million used for payments on borrowings, $119.5 million for acquisitions, $118.5 million for share repurchases (which includes $3.8 million of repurchases related to tax withholding requirements on restricted stock units), $80.6 million for capital expenditures, and a net investment of $61.7 million in long-term marketable securities. These items were partially offset by $289.0 million of cash provided by operations.

Accounts receivable were $201.7 million as of May 31, 2014, compared to $215.4 million at August 31, 2013. As of May 31, 2014, excluding accounts receivable and the related net revenue for Apollo Global, the Company's days sales outstanding was 18 days as compared to 20 days as of May 31, 2013.

Share Repurchases

Under its share repurchase program, the Company repurchased approximately 1.5 million shares of its common stock at a weighted average purchase price of $29.85 per share for a total cost of $45.0 million during the three months ended May 31, 2014. For the nine months ended May 31, 2014, the Company repurchased 3.8 million shares of its common stock at a weighted average price of $30.21 for a total cost of $114.7 million. The Company currently has approximately $135.3 million available on its share repurchase authorization. There is no expiration date on the repurchase authorizations and repurchases occur at management's discretion.

Business Outlook

The Company offers the following outlook for fiscal year 2014 based on the business trends observed during the third quarter 2014, as well as management's current expectations of future trends.

  • Net revenue of $3.04 to $3.06 billion; and
  • Operating income of $420 to $435 million, excluding the impact of special items.

Conference Call Information

The Company will hold a conference call to discuss these earnings results at 8:30 a.m. ET, 5:30 a.m. PT, today, Wednesday, June 25, 2014.

Dial-In Numbers:
877-292-6888 (Domestic)
973-200-3381 (International)
Conference ID: 35042411

Webcast and Replay:
A live webcast of this event will be available on the Apollo Education Group website at www.apollo.edu, with a webcast replay available approximately one hour following the conclusion of the call at the same link.

A telephone replay will be available approximately two hours following the conclusion of the call until July 2, 2014.

855-859-2056 (Domestic)
404-537-3406 (International)
Conference ID: 35042411

About Apollo Education Group, Inc.

Apollo Education Group, Inc. is one of the world's largest private education providers and has been in the education business since 1973. Through its subsidiaries: Apollo Global, College for Financial Planning, Institute for Professional Development, University of Phoenix, and Western International University, Apollo Education Group offers innovative and distinctive educational programs and services, online and on-campus, at the undergraduate, master's and doctoral levels. Its educational programs and services are offered throughout the United States and in Europe, Australia, Latin America, Africa and Asia, as well as online throughout the world. For more information about Apollo Education Group, Inc. and its subsidiaries, call (800) 990-APOL or visit www.apollo.edu.

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 impact of increased competition from traditional public universities and proprietary educational institutions; (ii) the costs and effectiveness of University of Phoenix initiatives to improve student retention, improve student outcomes and demonstrate a compelling and cost effective relationship between a student's education and career; (iii) changes in law or regulation affecting the 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 changes that may be included in the reauthorization of the federal Higher Education Act and the proposed Department of Education regulations relating to gainful employment and state authorization; (iv) any adverse impact on University of Phoenix's business arising from the Notice sanction imposed by the University's principal accreditor, and any associated impact on the University's pending recertification by the U.S. Department of Education for participation in Title IV student financial aid programs; (v) the impact of the Company's recent campus closures and other restructuring initiatives; (vi) the impact of the operational and governance changes made to increase University of Phoenix autonomy in response to governance concerns expressed by its principal accreditor; (vii) 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; (viii) the impact of changes in marketing channels and other recruiting practices; (ix) changes in University of Phoenix's business necessary to remain in compliance with U.S. federal student financial aid program regulations, including the so-called 90/10 Rule and the limitations on student loan cohort default rates, and to remain in compliance with the accrediting criteria of the relevant accrediting bodies; (x) changes in University of Phoenix enrollment or student mix; (xi) unexpected expenses or other challenges in integrating acquired businesses, consumer or regulatory impact arising from consummation of the acquired businesses, and unexpected changes or developments in the acquired businesses, and (xii) unexpected changes in the U.S. or global economy. 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 quarterly reports and Form 10-K for fiscal year 2013, and other filings with the Securities and Exchange Commission which are available at www.apollo.edu.

Use of Non-GAAP Financial Information

This press release and the related conference call contain non-GAAP financial measures, which 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.

 

Apollo Education Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(Unaudited)

   

Three Months Ended

May 31,

Nine Months Ended

May 31,

2014   2013   % of Net Revenue 2014   2013   % of Net Revenue
(In thousands, except per share data) 2014   2013 2014   2013
Net revenue $ 799,919 $ 946,774 100.0 % 100.0 % $ 2,335,312 $ 2,836,329 100.0 % 100.0 %
Costs and expenses:
Instructional and student advisory 327,764 393,387 41.0 % 41.5 % 987,018 1,209,239 42.3 % 42.6 %
Marketing 139,868 156,918 17.5 % 16.6 % 421,104 493,104 18.0 % 17.4 %
Admissions advisory 58,202 65,078 7.3 % 6.9 % 164,783 204,618 7.0 % 7.2 %
General and administrative 75,618 82,717 9.4 % 8.7 % 218,524 237,474 9.4 % 8.4 %
Depreciation and amortization 37,721 38,360 4.7 % 4.1 % 111,524 123,554 4.8 % 4.4 %
Provision for uncollectible accounts receivable 12,485 15,258 1.6 % 1.6 % 37,997 67,566 1.6 % 2.4 %
Contingent consideration charges and acquisition costs 16,168 2.0 % % 29,173 1.2 % %
Restructuring and other charges 14,904 63,103 1.9 % 6.7 % 62,076 131,295 2.7 % 4.6 %
Litigation charge (credit) 4,125     0.5 % % 13,125   (23,200 ) 0.6 % (0.8 )%
Total costs and expenses 686,855   814,821   85.9 % 86.1 % 2,045,324   2,443,650   87.6 % 86.2 %
Operating income 113,064 131,953 14.1 % 13.9 % 289,988 392,679 12.4 % 13.8 %
Interest income 453 506 % 0.1 % 1,620 1,443 0.1 % 0.1 %
Interest expense (1,915 ) (1,940 ) (0.2 )% (0.2 )% (5,984 ) (6,074 ) (0.2 )% (0.2 )%
Other (expense) income, net (284 ) (862 ) % (0.1 )% 630   811   % %
Income before income taxes 111,318 129,657 13.9 % 13.7 % 286,254 388,859 12.3 % 13.7 %
Provision for income taxes (46,308 ) (49,487 ) (5.8 )% (5.2 )% (110,026 ) (161,290 ) (4.8 )% (5.7 )%
Net income 65,010 80,170 8.1 % 8.5 % 176,228 227,569 7.5 % 8.0 %
Net loss (income) attributable to noncontrolling interests 1,015   (217 ) 0.2 % (0.1 )% 3,293   (594 ) 0.2 % %
Net income attributable to Apollo $ 66,025   $ 79,953   8.3 % 8.4 % $ 179,521   $ 226,975   7.7 % 8.0 %
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
 
 

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  
 
 

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
 
   

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, except enrollment data) 2014   2013 2014   2013
Net revenue:
University of Phoenix
Degree seeking gross revenues(1) $ 739,183 $ 907,766 $ 2,179,917 $ 2,700,903
Less: Discounts and other (69,055 ) (76,862 ) (189,752 ) (200,837 )
Degree seeking net revenues(1) 670,128 830,904 1,990,165 2,500,066
Other revenues 11,579   12,536   30,486   32,724  
Total University of Phoenix 681,707 843,440 2,020,651 2,532,790
Apollo Global 100,459 82,125 260,252 229,604
Other 17,753   21,209   54,409   73,935  
Net revenue $ 799,919   $ 946,774   $ 2,335,312   $ 2,836,329  
Operating income (loss):
University of Phoenix $ 135,153 $ 147,380 $ 405,308 $ 465,997
Apollo Global (13,845 ) 7,636 (51,632 ) (27,651 )
Other (8,244 ) (23,063 ) (63,688 ) (45,667 )
Operating income $ 113,064   $ 131,953   $ 289,988   $ 392,679  
University of Phoenix Enrollment Data:
Degreed Enrollment(2) 241,900 287,500
New Degreed Enrollment(3) 33,900 38,900
Degree seeking net revenues per degreed enrollment $ 2,770 $ 2,890
 
(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.
(2) Represents students enrolled in a University of Phoenix 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 the 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.
(3) Represents new students and students who have been out of attendance for more than 12 months who enroll in a University of Phoenix 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.
   

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) 2014   2013 2014   2013
Operating income $ 113,064 $ 131,953 $ 289,988 $ 392,679
Income before income taxes $ 111,318 $ 129,657 $ 286,254 $ 388,859
Provision for income taxes $ 46,308 $ 49,487 $ 110,026 $ 161,290
Effective income tax rate 41.6 % 38.2 % 38.4 % 41.5 %
Net income attributable to Apollo $ 66,025 $ 79,953 $ 179,521 $ 226,975
Diluted income per share attributable to Apollo $ 0.59 $ 0.71 $ 1.59 $ 2.01
Special items:
Restructuring and other charges $ 14,904 $ 63,103 $ 62,076 $ 131,295
Contingent consideration charges and acquisition costs 16,168 29,173
Litigation charge (credit) 4,125 13,125 (23,200 )
Gain related to foreign indirect taxes following resolution with tax authority(1) (11,173 )   (11,173 )  
Special items before income taxes 24,024 63,103 93,201 108,095
Less: income tax effects of special items (5,171 ) (23,941 ) (26,819 ) (40,110 )
Tax benefit from Internal Revenue Service settlement     (10,176 )  
Special items, net of income tax $ 18,853   $ 39,162   $ 56,206   $ 67,985  
Excluding special items:
Operating income $ 137,088 $ 195,056 $ 383,189 $ 500,774
Income before income taxes $ 135,342 $ 192,760 $ 379,455 $ 496,954
Provision for income taxes $ 51,479 $ 73,428 $ 147,021 $ 201,400
Effective income tax rate 38.0 % 38.1 % 38.7 % 40.5 %
Net income attributable to Apollo $ 84,878 $ 119,115 $ 235,727 $ 294,960
Diluted income per share attributable to Apollo $ 0.76 $ 1.05 $ 2.08 $ 2.61
 

(1) This gain is included in instructional and student advisory on our Condensed Consolidated Statements of Income.

Apollo Education Group, Inc.
Investor Relations Contacts:
Beth Coronelli, 312-660-2059
beth.coronelli@apollo.edu
Erin Kelly, 602-557-3830
erin.kelly@apollo.edu
Media Contact:
Media Relations Hotline, 602-254-0086
media@apollo.edu

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