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| APOL > SEC Filings for APOL > Form 10-Q on 29-Jun-2009 | All Recent SEC Filings |
29-Jun-2009
Quarterly Report
An overview of our business and the sectors of the education industry in which we operate;
Key trends, developments and challenges; and
Key highlights from the current period.
Critical Accounting Policies and Estimates: A discussion of our accounting policies that require critical judgments and estimates.
Recent Accounting Pronouncements: A discussion of recently issued accounting pronouncements.
Results of Operations: An analysis of our results of operations as reflected in our condensed consolidated financial statements.
Liquidity, Capital Resources, and Financial Position: An analysis of cash flows, contractual obligations and other commercial commitments, and discussion regarding federal and private student loans.
OVERVIEW
Apollo is one of the world's largest private education providers and has been a
provider of education services for more than 30 years. We offer innovative and
distinctive educational programs and services at the high school, undergraduate
and graduate levels through doctorate at our various campuses and learning
centers, and online throughout the world. Our wholly-owned operations focus
principally on working learners and include the following universities, colleges
and institutions:
University of Phoenix
Institute for Professional Development (IPD)
College for Financial Planning Institutes (CFP)
Western International University
Insight Schools
Meritus University
Our 80.1% owned subsidiary, Apollo Global, Inc., has international operations
whose subsidiaries currently include Universidad de Artes, Ciencias y
Comunicaciσn ("UNIACC") in Chile, and Universidad Latinoamericana ("ULA") in
Mexico.
Substantially all of our net revenue is composed of tuition and fees for
educational services. In fiscal year 2008, University of Phoenix accounted for
95.2% of our total net revenue. Additionally, approximately 77% of our fiscal
year 2008 total consolidated net revenue was derived from receipt of U.S. Title
IV financial aid program funds, principally federal student loans and Pell
grants.
We believe that a critical element of generating successful long-term growth and
attractive returns for our stakeholders is to provide the highest quality
educational products and services for our students in order for them to maximize
the benefits of their educational experience. Accordingly, we are intensely
focused on student success. We are continuously enhancing and expanding our
current service offerings and investing in academic quality. We have developed
customized computer programs for academic quality management, faculty
recruitment and training, student tracking, and marketing to help us more
effectively manage toward this objective. We believe we utilize one of the most
comprehensive learning assessment programs in the U.S., and in 2008 University
of Phoenix published its first Academic Annual Report. We are also focused on
improving student retention by enhancing student services, promoting
instructional innovation and improving academic support. All of these efforts
are designed to help our students stay in school and succeed.
Key Trends, Developments and Challenges
Our management team is focused on the following circumstances and trends that
present opportunities, challenges and risks as we work toward our goal of
providing attractive returns for all of our stakeholders:
Evolving Domestic Postsecondary Education Market. We believe domestic
postsecondary education continues to experience a profound shift from
traditional undergraduate students (those students living on campus and
attending classes full-time) to non-traditional students who work, are
raising a family, or are doing both while trying to earn a college degree.
This trend
continues to provide an opportunity for education providers such as University of Phoenix to provide quality academic programs and services that appeal to non-traditional students. We believe we are well positioned to capitalize on this trend.
Economic Downturn. The U.S. and much of the world economy are in the midst of an economic downturn. Although not quantifiable, we believe these conditions have contributed to a portion of our recent enrollment growth as an increased number of working learners seek to advance their education to improve their job security or reemployment prospects. One of our primary challenges will be to adequately and effectively service our increased student population without over-building our infrastructure and delivery platform in a manner that might result in excess capacity when the portion of our growth related to the economic downturn subsides. Additionally, see below under Critical Accounting Policies and Estimates a discussion of the impact of the economic downturn on our allowance for doubtful accounts.
Regulatory Environment
Compliance. Our domestic business is highly regulated by the U.S. Department of Education, the applicable academic accreditation agencies and state education regulatory authorities. Compliance with these regulatory requirements is a significant part of our administrative effort. In August 2008, the U.S. Congress reauthorized the Higher Education Act through 2013 by enacting the Higher Education Opportunity Act, which resulted in a large number of new and modified requirements that ultimately will be implemented through the U.S. Department of Education rulemaking. Little formal or informal guidance is available for many of these requirements, and we are focused on evaluating their implications and developing appropriate compliance procedures. Because our student body is large and we rely heavily on our computer systems, compliance with new or changed regulations can require significant time and effort on our part.
The "90/10 Rule." A requirement of the Higher Education Act, as reauthorized by the Higher Education Opportunity Act, commonly referred to as the "90/10 Rule," applies only to proprietary institutions of higher education, which includes University of Phoenix and Western International University. Under this rule, a proprietary institution will be ineligible to participate in Title IV programs if for any two consecutive fiscal years it derives more than 90% of its cash basis revenue, as defined in the Higher Education Act and the U.S. Department of Education regulations, from Title IV programs. An institution that derives more than 90% of its revenue from Title IV programs for any single fiscal year will be placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by the U.S. Department of Education in the exercise of its broad discretion. University of Phoenix and Western International University are required to calculate this percentage at the end of each fiscal year. University of Phoenix's and Western International University's Rule 90/10 percentages were 82% and 50%, respectively, for the fiscal year ended August 31, 2008, as compared to 69% and 52% for the fiscal year ended August 31, 2007.
In May 2008, the Ensuring Continued Access to Student Loans Act increased the annual loan limits on federal unsubsidized student loans by $2,000 for the majority of our students enrolled in associates and bachelors degree programs, and also increased the aggregate loan limits (over the course of a student's education) on total federal student loans for certain students. This increase in student loan limits, together with increases in Pell grants, has increased the amount of Title IV program funds used by students to satisfy tuition, fees and other costs, which has increased the proportion of our revenue deemed to be from Title IV programs. Consistent with this, the unfavorable trend experienced in fiscal 2008 compared to fiscal 2007 in the proportion of revenue derived from Title IV programs by University of Phoenix has continued during the first nine months of fiscal 2009. The Higher Education Opportunity Act provides temporary relief from the impact of these loan limit increases by allowing any amounts received between July 1, 2008 and July 1, 2011 that are attributable to the increased annual loan limits to be excluded from the 90/10 Rule calculation. The implementing regulations for this temporary relief are being developed in a negotiated rulemaking process involving the U.S. Department of Education, industry representatives and other interested parties. The proposed rules are expected to be published for comment by the U.S. Department of Education in July 2009, and are expected to be published in final form by November 1, 2009. There remains uncertainty about the manner in which the temporary relief will be implemented. We continue to monitor the rulemaking process, as the resolution of interpretive issues will impact the benefit we derive from the temporary relief.
Based on information currently available to us, we believe that the 90/10 Rule calculation for University of Phoenix will approach, but will not exceed 90% for fiscal year 2009. However, there are many relevant factors that are difficult to forecast. As a result, there is no assurance that the 90/10 Rule calculation for University of Phoenix will not exceed 90% for fiscal year 2009.
University of Phoenix is taking various measures to reduce the percentage of its cash basis revenue attributable to Title IV funds for our fiscal year ending August 31, 2009 and beyond, including emphasizing employer-paid and other direct-pay education programs, encouraging students to carefully evaluate the amount of necessary Title IV borrowing, and increasing the focus on professional development and continuing education. Although we expect that these measures will favorably impact the 90/10 Rule calculation, there is no assurance that these initiatives will be effective in reducing the 90/10 Rule calculation, or that they will be adequate to prevent the 90/10 Rule calculation from exceeding 90% for our fiscal year 2009 and in subsequent years.
If the 90/10 Rule calculation for University of Phoenix exceeds 90% for our fiscal year 2009, we will need to increase our efforts to reduce the percentage of our cash-basis revenue that is composed of Title IV funding. These efforts, and our other long-term initiatives to impact this calculation beyond 2009, may involve taking measures which increase our operating expenses and/or reduce our revenue and which, together, may have a materially adverse impact on our results of operations, cash flows and financial condition.
Certification. As part of our eligibility to participate in Title IV programs, our institutions involved in Title IV programs must be certified to participate and are required to periodically renew their certification. University of Phoenix was recertified in June 2003 and its current certification for Title IV programs expired in June 2007. In March 2007, University of Phoenix submitted its Title IV recertification application to the U.S. Department of Education. We have been collaborating with the U.S. Department of Education since that date and continue to supply additional follow-up information based on requests from the U.S. Department of Education. Our eligibility continues on a month-to-month basis until the U.S. Department of Education issues its decision on the application. A month-to-month status is not unusual considering the process is multi-faceted and iterative. Western International University was recertified in October 2003 and its current certification for participation in Title IV programs expires on June 30, 2009. In March 2009, Western International University submitted its Title IV recertification application to the U.S. Department of Education. Should the U.S. Department of Education not act on this application prior to the expiration date, Western International University's eligibility will continue on a month-to-month basis until the U.S. Department of Education completes it review on the application and issues its decision. As with University of Phoenix, a month-to-month status is not unusual and we have no reason to believe that the application will not be renewed in due course.
We believe that the renewal of the University of Phoenix application for recertification will be approved in due course even if University of Phoenix fails to meet the 90/10 Rule for fiscal 2009. However, the changes to the 90/10 Rule enacted by the Higher Education Opportunity Act, and the relevant draft regulations are not clear as to what impact a provisional status based on exceeding the 90/10 limit might have on the eligibility status of the University of Phoenix. In addition, the U.S. Department of Education has the discretion to impose time limitations or other conditions on an institution's participation in Title IV programs in connection with any recertification and may be more likely to do so if University of Phoenix fails to meet the 90/10 Rule limits. Accordingly, there is no assurance that, if University of Phoenix fails to meet the 90/10 Rule for fiscal year 2009, such failure would not have an adverse effect on its recertification application. Title IV eligibility is critical to the continued operation of our business. If University of Phoenix becomes ineligible to participate in Title IV federal student financial aid programs, we could not conduct our business as it is currently conducted and it would have a material adverse effect on our business, financial condition, results of operations and cash flows.
New U.S. Administration. In January 2009, Barack Obama was sworn in as the 44th U.S. President. It is too soon to predict the changes in higher education public policy that the Obama Administration may propose, or the effect of the current U.S. economic downturn on the Administration's ability to implement significant changes. However, in the Administration's 2010 budget request delivered to Congress on February 26, 2009, the U.S. Department of Education proposed to eliminate the Federal Family Education Loan Program (FFELP) and instead require all Title IV student loans to be administered through the Federal Direct Loan Program (FDLP) commencing July 1, 2010. We expect to be able to fully transition from the FFELP program to the FDLP by the proposed July 1, 2010 phase-out date, if necessary. If this proposal is adopted, the transition would require us to develop and implement administrative capabilities and procedures for volume processing of loans under the FDLP. If we experience a disruption in our ability to process student loans through the FDLP, either because of administrative challenges on our part or the inability of the U.S. Department of Education to process the substantial increase in direct loans, our results of operations and cash flows could be adversely and materially affected. Other policy and program changes in the U.S. Department of Education may present opportunities and challenges for our business, the scope and magnitude of which cannot now be determined. During our third quarter of fiscal year 2009, we began participating in the FDLP for a small portion of our Title IV eligible students.
Opportunities to Expand into New Markets. We believe that there is a growing demand for high quality education outside the U.S. and that we have capabilities and expertise that can be useful in providing these services beyond our current reach. We believe we can deploy our key capabilities in student services, technology and marketing to expand into new markets to further our mission of providing high quality, accessible education. We intend to actively pursue quality opportunities to partner with and/or acquire existing institutions of higher learning where we believe we can achieve long-term attractive growth and value creation.
On June 7, 2009, our 80.1% -owned subsidiary, Apollo Global entered into an Implementation Agreement to acquire BPP Holdings plc ("BPP"), a UK-based provider of education and training to professionals in the legal and finance industries. Pursuant to the acquisition arrangement, Apollo Global will acquire all of the outstanding shares of BPP for a cash purchase price of 620 pence per share, which represents an enterprise value of approximately $540 million based upon the exchange rate on June 5, 2009.
For a more detailed discussion of trends, risks and uncertainties, and our
strategic plan, please refer to our 2008 Annual Report on Form 10-K.
Fiscal Year 2009 Highlights
During the first nine months of fiscal year 2009, we experienced the following
significant events:
1. Degreed Enrollment and New Degreed Enrollment Growth. We achieved 20.3%
growth in average University of Phoenix Degreed Enrollment for the nine
months ended May 31, 2009 as compared to the nine months ended May 31, 2008.
University of Phoenix New Degreed Enrollment during the first nine months of
fiscal year 2009 increased 23.7% as compared to the first nine months of
fiscal year 2008. We believe the enrollment growth is primarily attributable
to continued investments in enhancing and expanding University of Phoenix
service offerings and academic quality, which has attracted new students and
increased student retention. Enhancements in our marketing capabilities have
also contributed to the increases. We also believe that a portion of the
increase in University of Phoenix Degreed Enrollment and New Degreed
Enrollment is due to the current economic downturn, as working learners seek
to advance their education to improve their job security or reemployment
prospects.
2. Net Revenue Growth. Our net revenue increased 25.5% for the nine months ended May 31, 2009 as compared to the nine months ended May 31, 2008 primarily as a result of University of Phoenix Degreed Enrollment growth and selective tuition price increases.
3. Income from Operations Growth. Our income from operations increased 122.5%, or $467.4 million for the nine months ended May 31, 2009 as compared to the nine months ended May 31, 2008 primarily as a result of the securities litigation charge of $170.0 million in the nine months ended May 31, 2008, which was subsequently reversed in the fourth quarter of fiscal year 2008, and University of Phoenix net revenue growth described above and associated economies of scale for certain costs that remain relatively fixed. Excluding the securities litigation charge in the nine months ended May 31, 2008, our income from operations grew 53.9% for the nine months ended May 31, 2009 as compared to the nine months ended May 31, 2008.
4. Changes in Management and Addition of Directors. The following changes in management and addition of directors occurred during our third quarter of fiscal year 2009:
On April 24, 2009, our Board of Directors promoted Gregory W. Cappelli to the position of Co-Chief Executive Officer. Mr. Cappelli had previously been serving as the Executive Vice President of Global Strategy and Assistant to the Executive Chairman. Mr. Cappelli continues to serve as Chairman of Apollo Global and Director of Apollo Group.
On March 26, 2009, our Board of Directors promoted Joseph L. D'Amico to President and Chief Operating Officer, Brian L. Swartz to Senior Vice President, Chief Financial Officer and Treasurer, and Gregory J. Iverson to Vice President, Chief Accounting Officer and Controller. Mr. D'Amico had previously been serving as President and Chief Financial Officer, Mr. Swartz had previously been serving as Senior Vice President of Finance and Chief Accounting Officer, and Mr. Iverson had previously been serving as Vice President and Corporate Controller.
On March 11, 2009, our Class B Shareholders reelected our existing ten incumbent directors to the Board of Directors and elected three additional directors: Terri C. Bishop, our Executive Vice President of External Affairs, and independent directors, Stephen J. Giusto and Manuel F. Rivelo.
On March 25, 2009, Frederick J. Newton commenced employment as Senior Vice President of Human Resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a detailed discussion of our critical accounting policies and estimates,
please refer to our 2008 Annual Report on Form 10-K. Included below is an update
for certain of our Critical Accounting Policies and Estimates as of May 31,
2009.
Goodwill
At May 31, 2009, we completed our annual goodwill and indefinite lived
intangible asset impairment tests for the following reporting units that have
goodwill impairment test dates of May 31:
University of Phoenix,
UNIACC and ULA (included in the Apollo Global reportable segment),
Insight Schools, and
Western International University (included in the Other Schools reportable segment).
At May 31, 2009, the fair value of each of these reporting units exceeded the
carrying value of their respective net assets resulting in no goodwill
impairment charges recorded. Additionally, the results of the May 31st
impairment tests indicate that the current economic downturn has not had a
significant long-term adverse impact on the fair value of these reporting units,
although we observed a narrowing of the margin between fair value and carrying
value for certain of our reporting units. To determine the fair value of our
reporting units, we rely primarily on using discounted cash flow valuation
methods which requires management to make subjective judgments relating to
future cash flows based on our knowledge of the business and current plans to
operate the business, growth rates, economic and market conditions, and
applicable discount rates. Generally, our goodwill impairment tests used
discount rates ranging from 15.0% to 15.5% and perpetual growth rates ranging
from 2% to 3%. For certain of our goodwill impairment tests we used a
combination of discounted cash flow analysis and market-based approach, and
applied a 75%/25% weighting factor to the respective approaches. Our UNIACC and
ULA reporting units have indefinite lived intangible assets consisting of
trademarks and accreditations of approximately $5.5 million. At May 31, we
performed a fair value analysis of these indefinite lived intangible assets and
determined there was no impairment. Please refer to our significant accounting
policies included in our 2008 Annual Report on Form 10-K for further discussion
of the valuation techniques used to estimate the fair value of our reporting
units and indefinite lived intangible assets. As further discussed in Note 7,
Fair Value Measurements, we will adopt SFAS 157 with respect to using fair value
measurements in the valuation techniques associated with our annual goodwill and
indefinite lived intangible assets impairment tests effective September 1, 2009.
Our Insight Schools reporting unit had goodwill of approximately $12.7 million
at May 31, 2009. As Insight Schools has expanded its business, it has
encountered a number of administrative challenges in its compliance activities.
We expect that these challenges and anticipated start-up expenses will limit the
growth rate of the Insight Schools business and result in decreased revenue and
increased operating expenses. We considered this factor in our annual goodwill
impairment test of Insight Schools as of May 31 and determined that the goodwill
balance is not impaired.
At May 31, 2009, our CFP reporting unit had goodwill of approximately
$15.3 million, which is included in the Other Schools reportable segment. We
perform our annual goodwill impairment test of CFP as of August 31. However, the
current economic downturn has caused the demand for CFP's financial planning
education programs and materials to diminish. As of May 31, 2009, we evaluated
and determined that the goodwill balance is not impaired. However, as more
information becomes available we will further assess the carrying value of CFP's
goodwill at the annual goodwill impairment test date of August 31 and may record
an impairment charge at that time or in the future if further deterioration
occurs.
Allowance for Doubtful Accounts
The U.S. and much of the world economy are in the midst of an economic downturn.
In accordance with our related accounting policy, we periodically evaluate our
standard allowance estimation methodology for propriety and modify as necessary.
As of May 31, 2009, we have considered the current credit and economic
environment in our evaluation of our accounts receivable and related allowance
for doubtful accounts. Therefore, in accordance with our related accounting
policy, we have recorded our best estimate of bad debt expense for the three and
nine months ended May 31, 2009, which includes consideration of the risk of
collecting aged receivables given the current economic downturn, including
continued increases in the U.S. unemployment rate.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2, Basis of Presentation, in Item 1, Financial Statements,
for recent accounting pronouncements.
RESULTS OF OPERATIONS
We have included below a discussion of our operating results and significant
items which explain the material changes in our operating results during the
three and nine months ended May 31, 2009 and 2008. Our operations are generally
subject to seasonal trends. We experience, and expect to continue to experience,
seasonal fluctuations in our results of operations as a result of changes in the
level of student enrollments. While University of Phoenix enrolls students
throughout the year, our net revenue generally is lower in the second quarter
(December through February) than the other quarters due to holiday breaks in
December and January. Other of our subsidiaries experience more significant
seasonality, as they have limited enrollment during their respective summer
breaks.
We categorize our operating expenses as instructional costs and services,
selling and promotional, and general and administrative.
Instructional costs and services - consist primarily of costs related to the
delivery and administration of our educational programs and include costs
related to faculty and administrative compensation, classroom lease expenses
and depreciation, bad debt expense, financial aid processing costs and other
related costs. Tuition costs for all employees and their eligible family
members are recorded as an expense within instructional costs and services.
Selling and promotional costs - consist primarily of compensation for enrollment counselors, management and support staff and corporate marketing, advertising expenses, production of marketing materials, and other costs directly related to selling and promotional functions. Selling and promotional costs are expensed when incurred.
General and administrative costs - consist primarily of corporate compensation, occupancy costs, depreciation and amortization of property and equipment, legal and professional fees, and other related costs.
For the three months ended May 31, 2009 compared to the three months ended
May 31, 2008
Analysis of Condensed Consolidated Statements of Income
The table below details our consolidated results of operations. For a more
detailed discussion by reportable segment, refer to our Analysis of Operating
Results by Segment.
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