Restructuring and Other Charges

The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We are reengineering our business processes and refining our educational delivery systems to improve the effectiveness of our services to students, and reducing the size of our services infrastructure and associated operating expenses to align with our reduced enrollment. We have incurred restructuring and other charges associated with these activities beginning in fiscal year 2011 as summarized below:



	Three Months Ended November 30,				Cumulative Costs as of November 30, 2013
($ in thousands)	2013		2012		Cumulative Costs as of November 30, 2013
Lease and related costs, net	$	13,760	$	10,112	$	186,071
Severance and other employee separation costs	15,254		10,943		66,280
Other restructuring related costs	2,949		3,061		39,845
Restructuring and other charges	$	31,963	$	24,116	$	292,196

The following summarizes the restructuring and other charges in our segment reporting format:



	Three Months Ended November 30,				Cumulative Costs as of November 30, 2013
($ in thousands)	2013		2012		Cumulative Costs as of November 30, 2013
University of Phoenix	$	25,426	$	16,896	$	227,098
Apollo Global	1,263		79		13,028
Other	5,274		7,141		52,070
Restructuring and other charges	$	31,963	$	24,116	$	292,196

The following details the changes in our restructuring liabilities by type of cost during the three months ended November 30, 2013:



($ in thousands)	Lease and Related Costs, Net			Severance and Other Employee Separation Costs			Other Restructuring Related Costs			Total
Balance at August 31, 2013⁽¹⁾	$	104,048		$	7,623		$	8,130		$	119,801
Restructuring and other charges	13,760			15,254			2,949			31,963
Non-cash adjustments⁽²⁾	(1,490		)	(1,862		)	—			(3,352		)
Payments	(15,532		)	(10,740		)	(3,679		)	(29,951		)
Balance at November 30, 2013⁽¹⁾	$	100,786		$	10,275		$	7,400		$	118,461

⁽¹⁾The current portion of our restructuring liabilities was $57.9 million and $55.2 million as of November 30, 2013 and August 31, 2013, respectively. These balances are included in accrued and other current liabilities on our Condensed Consolidated Balance Sheets and the long-term portion is included in other long-term liabilities. The gross, undiscounted obligation associated with our restructuring liabilities as of November 30, 2013 is approximately $190 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.

⁽²⁾ Non-cash adjustments for lease and related costs, net represents $2.8 million of accelerated depreciation, partially offset by the release of certain associated liabilities such as deferred rent. Non-cash adjustments for severance and other employee separation costs represents share-based compensation.

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Lease and Related Costs, Net - Beginning in fiscal year 2011, University of Phoenix began rationalizing its administrative real estate facilities. In addition to continuing to rationalize its administrative facilities, University of Phoenix began implementing a plan during fiscal year 2013 to close 115 of its ground locations. As of November 30, 2013, University of Phoenix has closed approximately two-thirds of the locations included in these plans, which represents approximately 85% of the total square feet we are exiting. The remaining closures will continue through fiscal year 2014 and beyond as University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations. We have recorded $133.6 million of initial aggregate charges, representing the estimated fair value of future contractual operating lease obligations, which were recorded in the periods we ceased using the respective facilities, $10.0 million of which was recorded in the three months ended November 30, 2013. The other lease and related costs in the three months ended November 30, 2013 consist of accelerated depreciation, as discussed below, and interest accretion on the lease obligations.

We measure lease obligations at fair value using a discounted cash flow approach encompassing significant unobservable inputs (Level 3). The significant unobservable inputs principally include estimated future cash flows and discount rates, which have ranged between 3%-6% for our lease obligations. The estimation of future cash flows includes non-cancelable contractual lease costs over the remaining terms of the leases, partially offset by estimated future sublease rental income, which involves significant judgment. Our estimate of the amount and timing of sublease rental income considers subleases that we have executed and subleases we expect to execute, current commercial real estate market data and conditions, comparable transaction data and qualitative factors specific to the facilities. The estimates will be subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. As of November 30, 2013, we have recorded adjustments to our initial lease obligation liabilities for interest accretion and immaterial adjustments for changes in estimated sublease income.

Lease and related costs, net includes $2.8 million of accelerated depreciation in the three months ended November 30, 2013 associated with revising the useful lives of the fixed assets at the facilities we are closing through their expected closure dates. Prior to revising the useful lives, we perform a recoverability analysis for the facilities’ fixed assets by comparing the estimated undiscounted cash flows of the locations through their expected closure dates to the carrying amount of the locations’ fixed assets. Based on such analyses, we recorded immaterial impairment charges during fiscal year 2013 and no impairment charges in the three months ended November 30, 2013.

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Severance and Other Employee Separation Costs - Beginning in fiscal year 2011 and continuing into fiscal year 2014, we have implemented workforce reductions as we reengineer our business processes and refine our educational delivery systems. We incurred severance and other employee separation costs of $15.3 million and $10.9 million in the three months ended November 30, 2013 and November 30, 2012, respectively. These costs are included in the reportable segments in which the respective personnel were employed.

We expect to incur approximately $35 million of future restructuring charges for the initiatives announced to date. The majority of these charges represent lease related costs associated with closing University of Phoenix campuses and administrative facilities, and will generally be incurred as the University obtains the necessary regulatory approvals and completes its teach-out obligations. We expect to incur approximately half of the $35 million in the remainder of fiscal year 2014 and the rest of the expected charges in future years.