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 and revenue. We have incurred restructuring and other charges associated with these activities beginning in fiscal year 2011 as summarized below:



	Three Months Ended February 28,				Six Months Ended February 28,				Cumulative Costs as of February 28, 2014
($ in thousands)	2014		2013		2014		2013		Cumulative Costs as of February 28, 2014
Lease and related costs, net	$	9,505	$	34,640	$	23,265	$	44,752	$	195,576
Severance and other employee separation costs	4,863		8,217		20,117		19,160		71,143
Other restructuring related costs	841		1,219		3,790		4,280		40,686
Restructuring and other charges	$	15,209	$	44,076	$	47,172	$	68,192	$	307,405

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



	Three Months Ended February 28,				Six Months Ended February 28,				Cumulative Costs as of February 28, 2014
($ in thousands)	2014		2013		2014		2013		Cumulative Costs as of February 28, 2014
University of Phoenix	$	11,229	$	38,445	$	36,655	$	55,341	$	238,327
Apollo Global	304		3,336		1,567		3,415		13,332
Other	3,676		2,295		8,950		9,436		55,746
Restructuring and other charges	$	15,209	$	44,076	$	47,172	$	68,192	$	307,405

The following details the changes in our restructuring liabilities by type of cost during the six months ended February 28, 2014:



($ 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	23,265			20,117			3,790			47,172
Non-cash adjustments⁽²⁾	(1,811		)	(2,326		)	—			(4,137		)
Payments	(27,082		)	(16,437		)	(4,015		)	(47,534		)
Balance at February 28, 2014⁽¹⁾	$	98,420		$	8,977		$	7,905		$	115,302

⁽¹⁾The current portion of our restructuring liabilities was $56.7 million and $55.2 million as of February 28, 2014 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 February 28, 2014 is approximately $175 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 $4.3 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 February 28, 2014, University of Phoenix has closed approximately three-fourths of the locations included in these plans, which represents approximately 90% 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 $140.6 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, $17.0 million of which was recorded in the six months ended February 28, 2014. The other lease and related costs in the six months ended February 28, 2014 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 February 28, 2014, 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 $4.3 million of accelerated depreciation in the six months ended February 28, 2014 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 six months ended February 28, 2014.

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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 $20.1 million in the six months ended February 28, 2014. These costs are included in the reportable segments in which the respective personnel were employed.

Excluding interest accretion associated with our lease obligation liabilities, we expect to incur approximately $10 million of future restructuring charges for the initiatives announced to date. These costs will generally be incurred over the period of time University of Phoenix obtains the necessary regulatory approvals and completes its teach-out obligations associated with campuses that have not yet been closed.