NOTE 8: INTANGIBLE ASSETS

Intangible assets relate mainly to acquired business operations. These assets consist of the acquisition fair value of certain identifiable intangible assets acquired and goodwill. Goodwill represents the excess of cost over the fair value of the net tangible and intangible assets acquired.

Intangible assets consist of the following (in thousands):

	As of March 31, 2016
	Gross				Weighted Average
	Carrying		Accumulated		Amortization
	Amount		Amortization		Period
Amortizable Intangible Assets:
Student Relationships	$	13,082		(5,430)		(a)
Customer Relationships		400		(160)		10 Years
Test Prep Relationships		900		(900)		1 Year
Non-compete Agreements		940		(752)		5 Years
Curriculum/Software		3,881		(1,786)		5 Years
Outplacement Relationships		3,900		(1,959)		15 Years
Franchise Contracts		9,875		(640)		18 Years
Clinical Agreements		366		(67)		15 Years
Trade Names		1,064		(746)		10 Years
Total	$	34,408	$	(12,440)
Indefinite-lived Intangible Assets:
Trade Names	$	66,808
Trademarks		1,645
Ross Title IV Eligibility and Accreditations		14,100
Intellectual Property		13,940
Chamberlain Title IV Eligibility and Accreditations		1,200
Carrington Title IV Eligibility and Accreditations		60,700
AUC Title IV Eligibility and Accreditations		100,000
DeVry Brasil Accreditation		90,685
Total	$	349,078

(a)

The total weighted average estimated amortization period for Student Relationships is 6 years for Faculdade Boa Viagem ("FBV"), 5 years for Centro Universitário Vale do Ipojuca ("Unifavip"), 6 years for Damasio and 5 years for Grupo Ibmec.

	As of March 31, 2015
	Gross
	Carrying		Accumulated
	Amount		Amortization
Amortizable Intangible Assets:
Student Relationships	$	82,754	$	(77,946)
Customer Relationships		3,294		(1,245)
Test Prep Relationships		1,006		(168)
Non-compete Agreements		2,467		(2,091)
Curriculum/Software		3,026		(2,381)
Outplacement Relationships		3,900		(1,699)
Franchise Contracts		11,032		(102)
Clinical Agreements		409		(48)
Trade Names		5,091		(4,614)
Total	$	112,979	$	(90,294)
Indefinite-lived Intangible Assets:
Trade Names	$	47,864
Trademarks		1,645
Ross Title IV Eligibility and Accreditations		14,100
Intellectual Property		13,940
Chamberlain Title IV Eligibility and Accreditations		1,200
Carrington Title IV Eligibility and Accreditations		67,200
AUC Title IV Eligibility and Accreditations		100,000
DeVry Brasil Accreditation		56,366
Total	$	302,315

Amortization expense for amortized intangible assets was $1.4 million and $4.0 million for the three and nine months ended March 31, 2016, respectively, and $1.2 million and $2.5 million for the three and nine months ended March 31, 2015, respectively. Estimated amortization expense for amortizable intangible assets by reporting unit for the next five fiscal years ending June 30, and in the aggregate, is as follows (in thousands):

Fiscal Year	Carrington		DeVry Brasil		Becker		Total
2016	$	260	$	4,672	$	557	$	5,489
2017		260		4,294		311		4,865
2018		260		2,994		40		3,294
2019		260		2,062		40		2,362
2020		260		1,396		40		1,696
Thereafter		836		7,410		70		8,316

All amortizable intangible assets except student relationships are being amortized on a straight-line basis. The amount being amortized for student relationships is based on the estimated progression of the students through the respective FBV, Unifavip, Damasio and Grupo Ibmec programs, giving consideration to the revenue and cash flow associated with both existing students and new applicants.

Indefinite-lived intangible assets related to trademarks, trade names, Title IV eligibility, accreditations and intellectual property are not amortized, as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity.

In accordance with U.S. GAAP, goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, these assets must be reviewed annually for impairment or more frequently if circumstances arise indicating potential impairment. This annual impairment review was most recently completed as of May 31, 2015. As of the May 31, 2015 impairment review, there was no impairment loss associated with recorded goodwill or indefinite-lived intangible assets for any reporting unit, as estimated fair values exceeded the carrying amounts.

For goodwill, DeVry Group estimates the fair value of its reporting units primarily using a discounted cash flow model utilizing inputs which include projected operating results and cash flows from management’s long-term plan. If the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the “implied fair value” of the reporting unit goodwill is less than the carrying amount of the goodwill.

For indefinite-lived intangible assets, DeVry Group determines their fair value based on the nature of the asset using various valuation techniques including a royalty rate model for trade names, trademarks and intellectual property, a discounted income stream model for Title IV eligibility and a discounted cash flow model for accreditation. The estimated fair values of these indefinite-lived intangible assets are based on management’s projection of revenue, gross margin, operating costs and cash flows considering planned business and operational strategies over a long-term planning horizon of five years. The assumed royalty rates and the growth rates used to project cash flows and operating results are based upon historical results and analysis of the economic environment in which the reporting units that record indefinite-lived intangible assets operate. The valuations employ present value techniques to measure fair value and consider market factors. Management believes the assumptions used for the impairment testing are consistent with those that would be utilized by a market participant in performing similar valuations of its indefinite-lived intangible assets. The discount rates of 13% to 15% that were utilized in the valuations take into account management’s assumptions on growth rates and risk, both institution specific and macroeconomic, inherent in each reporting unit that records indefinite-lived intangible assets. These intangible assets are closely tied to the overall risk of the reporting units in which they are recorded so management would expect the discount rates to also match those used for valuing these reporting units.

Management considers certain triggering events when evaluating whether an interim impairment analysis is warranted. Among these would be a significant long-term decrease in the market capitalization of DeVry Group based on events specific to DeVry Group’s operations. Management believes the decline in the market capitalization of DeVry Group is indicative of the reaction to the news of regulatory inquires, in particular a reaction to the Federal Trade Commission civil complaint filed against DeVry University in January 2016 (see “Note 12: Commitments and Contingencies”), as well as continuing declining enrollment and financial results of DeVry University. DeVry University’s contributions to the operating results of DeVry Group have been diminishing for several years as this institution shrinks and the other institutions continue to grow; however, the market continues to react unfavorably as if DeVry University was a much larger contributor to DeVry Group. Management concluded that the decline in market capitalization during fiscal year 2016 was not indicative that the fair values of the DeVry Group reporting units had more likely than not declined below their carrying values. DeVry Group will perform its annual impairment test during the fourth quarter of fiscal year 2016. Other triggering events that could be cause for an interim impairment review would be changes in the accreditation, regulatory or legal environment, increased competition, innovation changes and changes in the market acceptance of our educational programs and the graduates of those programs, among others.

During the second quarter of fiscal year 2016, revenue and operating income for the Carrington reporting unit were significantly below management’s operating plan. Carrington had invested in faculty and program costs based on planned growth in enrollment; however, new student enrollment did not meet plan and costs could not be reduced commensurate with these enrollment shortfalls. This plan was utilized in the impairment review completed as of May 31, 2015. In this review, the Carrington fair value exceeded its carrying value by 8%. Carrington’s second quarter revenue was 12% below plan. As a result of this revenue shortfall, Carrington generated a fully allocated operating loss in the second quarter as compared to planned operating income.

Based upon these facts and circumstances, management performed an interim impairment review as of November 30, 2015 for the Carrington indefinite-lived intangible asset and the Carrington reporting unit. As a result of the revenue shortfall experienced in the second quarter of fiscal year 2016, management revised its fiscal 2016 forecast and future cash flow projections for Carrington. To determine the fair value of the Carrington indefinite-lived intangible asset and Carrington reporting unit in our interim step one impairment analysis, a discounted cash flow valuation method was utilized incorporating assumptions that a reasonable market participant would use regarding the impact of the current operating losses and the increased uncertainty impacting future operations. Management used significant unobservable inputs (Level 3) in our discounted cash flow valuation including future cash flow projections and discount rate assumptions.

For indefinite-lived intangible assets, DeVry Group determines fair value based on the nature of the asset using various valuation techniques including a discounted cash flow model for the Carrington accreditation and Title IV eligibility. The estimated fair values of indefinite-lived intangible assets are based on management’s projection of revenue, gross margin, operating costs and cash flows considering planned business and operational strategies over a long-term planning horizon of five years. The assumed growth rates used to project cash flows and operating results are commensurate with historical results and analysis of the economic environment in which the reporting unit that records indefinite-lived intangible assets operates. The valuations employ present value techniques to measure fair value and consider market factors. Management believes the assumptions used for the impairment testing are consistent with those that would be utilized by a market participant in performing similar valuations of its indefinite-lived intangible assets. The discount rate of 14% that was utilized in the Carrington valuation takes into account management’s assumptions on growth rates and risk, both institution specific and macro-economic, inherent in the reporting unit. This rate is higher than the 13% used in the fiscal year 2015 valuation due to the addition of an institution specific premium necessitated by an increased risk of meeting future operating plans. This intangible asset is closely tied to the overall risk of the reporting unit in which it is recorded so management would expect the discount rate to approximate that used for valuing this reporting unit. Management bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. There have been no changes in the indefinite-lived valuation methodology since the May 31, 2015 annual impairment analysis.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each reporting unit is based on management’s projection of revenue, gross margin, operating costs and cash flows considering planned business and operational strategies over a long-term planning horizon of five years along with a terminal value calculated based on discounted cash flows. These measures of business performance are similar to those management uses to evaluate the results of operations on a regular basis. The growth rates used to project cash flows, operating results and terminal values of reporting units are commensurate with historical results and future plans and analysis of the economic environment in which the reporting units operate. The valuations employ present value techniques to estimate fair value and consider market factors.

Management’s interim step one impairment analysis in the second quarter of fiscal year 2016 resulted in an estimated fair value for the Carrington accreditation and Title IV eligibility intangible asset of $60.7 million which was $6.5 million less than its carrying value at November 30, 2015. Based on a calculation of the estimated fair value of the Carrington reporting unit and a hypothetical purchase price allocation which included the estimated fair value of the accreditation and Title IV eligibility intangible asset, management determined the Carrington reporting unit would have implied goodwill of $5.8 million. This was $93.0 million less than the carrying value of this reporting unit. Accordingly, Carrington’s accreditation and Title IV eligibility indefinite-lived intangible assets and the goodwill balance were considered to be impaired and were written down by $6.5 million and $93.0 million, respectively, in the second quarter of fiscal year 2016. In the third quarter of fiscal year 2016, Carrington operating results were below the fiscal year 2016 plan used in the second quarter analysis. The implementation of planned business and operational changes did not produce the expected results. However, management believes that its strategic plan will produce operating results and cash flows in-line with the expectations in the November 30, 2015 impairment analysis. Therefore, no triggering event has occurred which would warrant an interim impairment analysis of the Carrington reporting unit or intangible assets. However, should Carrington’s financial performance or future updates to projections continue to fall significantly below the management expectations used in the second quarter of fiscal year 2016 impairment analysis, the carrying value of this reporting unit may in the future exceed its fair value and goodwill and intangible assets could be further impaired. This could require a write-off of up to $66.5 million.

Management also evaluated Carrington’s remaining long-lived assets, including leasehold improvements and equipment and finite-lived intangible assets, for recoverability and determined there was no impairment. Therefore, in the second quarter of fiscal year 2016, Carrington’s goodwill and other intangibles impairment charges in the aggregate were $99.5 million, with an income tax benefit of $13.5 million resulting in an after tax impairment charge of $86.0 million.

This interim triggering event analysis was limited to Carrington because only Carrington had a small enough margin between estimated fair value and carrying value as of May 31, 2015 where the actual results in the second quarter deviated from plan by an amount sufficient to result in a possible impairment. The estimated fair values of DeVry Group’s indefinite-lived intangible assets exceeded their carrying values by no less than 56% as of the end of fiscal year 2015, except the AUC accreditation where the excess was 7%. Operating income at all reporting units except Carrington, as discussed above, during the first nine months of fiscal year 2016 was not materially different from the budgeted operating income that was used in the impairment analysis as of May 31, 2015; thus, management does not believe the fair values of any reporting unit would have declined enough to fall below the carrying values except that of Carrington where an impairment was recorded in the second quarter of fiscal year 2016.

For the first nine months of fiscal year 2016 the DeVry University reporting unit experienced a 22.9% decline in revenue and a decline in operating income, before restructuring charges and a gain on the sale of assets, of 18.4% from the year-ago period. This reporting unit’s operating income was also short of plan by $3.0 million for the first nine months of fiscal year 2016. In reviewing these results management determined that it did not believe business conditions had deteriorated such that it was more likely than not that the fair value of DeVry University was below carrying value for this reporting unit or its associated indefinite-lived intangible assets as of March 31, 2016. DeVry University’s current and forecasted profitability was sufficient to maintain a fair value greater than its carrying value. The fair value of this reporting unit exceeded its carrying value by 114% as of the May 31, 2015 valuation date. DeVry University has been able to adjust operating expenses to offset in excess of 90 percent of the revenue declines experienced over the last several years. This has resulted in positive cash flows sufficient to produce a fair value in excess of the carrying value of this reporting unit. Should management not be able to adjust costs to offset future declines in student enrollment and revenue, resulting in financial performance that is significantly below management expectations, the carrying value of this reporting unit may exceed its fair value, and goodwill and intangible assets could be impaired. This could require a write-off of up to $23.8 million.

Determining the fair value of a reporting unit or an intangible asset involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates which could lead to additional impairments of intangible assets.

At March 31, 2016, intangible assets from business combinations totaled $371.0 million and goodwill totaled $565.0 million. Together, these assets equaled approximately 44% of total assets as of such date, and any impairment could significantly affect future results of operations.