Restructuring and Other Charges

The U.S. higher education industry is experiencing unprecedented, rapidly developing changes that challenge many of the core principles underlying the industry. We are reengineering and simplifying 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:



	Year Ended August 31,						Cumulative Costs as of August 31, 2014
($ in thousands)	2014		2013		2012		Cumulative Costs as of August 31, 2014
Lease and related costs, net	$	47,279	$	137,263	$	15,981	$	219,590
Severance and other employee separation costs	33,215		32,690		12,887		82,638
Other restructuring related costs	4,849		27,069		9,827		41,745
Restructuring and other charges	$	85,343	$	197,022	$	38,695	$	343,973

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



	Year Ended August 31,						Cumulative Costs as of August 31, 2014
($ in thousands)	2014		2013		2012		Cumulative Costs as of August 31, 2014
University of Phoenix	$	61,899	$	158,757	$	20,002	$	263,571
Apollo Global	6,091		6,053		5,712		17,856
Other	17,353		32,212		12,981		62,546
Restructuring and other charges	$	85,343	$	197,022	$	38,695	$	343,973

The following details the changes in our restructuring liabilities by type of cost during fiscal years 2014 and 2013:



($ in thousands)	Lease and Related Costs, Net			Severance and Other Employee Separation Costs			Other Restructuring Related Costs			Total
Balance at August 31, 2012	$	26,024		$	2,998		$	1,411		$	30,433
Restructuring and other charges	137,263			32,690			27,069			197,022
Other⁽¹⁾	(31,114		)	(405		)	(12,221		)	(43,740		)
Payments	(28,125		)	(27,660		)	(8,129		)	(63,914		)
Balance at August 31, 2013⁽²⁾	104,048			7,623			8,130			119,801
Restructuring and other charges	47,279			33,215			4,849			85,343
Other⁽¹⁾	(3,251		)	(4,281		)	—			(7,532		)
Payments	(51,872		)	(30,870		)	(11,787		)	(94,529		)
Balance at August 31, 2014⁽²⁾	$	96,204		$	5,687		$	1,192		$	103,083

⁽¹⁾ Other for lease and related costs, net represents $7.6 million and $50.1 million of accelerated depreciation in fiscal years 2014 and 2013, respectively, partially offset by the release of certain associated liabilities such as deferred rent. Other for severance and other employee separation costs primarily represents share-based compensation.

⁽²⁾The current portion of our restructuring liabilities was $43.3 million and $55.2 million as of August 31, 2014 and 2013, respectively. These balances are included in accrued and other current liabilities on our 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 August 31, 2014 was approximately $170 million, which principally represents non-cancelable leases that will be paid over the respective lease terms through fiscal year 2023.

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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 closing 115 of its ground locations during fiscal year 2013. After these closures, the University operates 110 ground campus locations throughout the U.S. and Puerto Rico. However, the University continues to evaluate the extent, functionality and location of its ground facilities because of the rapidly evolving and transformational changes in higher education.

As of August 31, 2014, University of Phoenix has closed the substantial majority of the total square feet included in the above plan and has recorded $158.3 million of initial aggregate charges representing the estimated fair value of future contractual operating lease obligations. These charges were recorded in the periods we ceased using the respective facilities. 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 are subject to adjustment as market conditions change or as new information becomes available, including the execution of additional sublease agreements. As of August 31, 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 also includes $7.6 million and $50.1 million of accelerated depreciation during fiscal years 2014 and 2013, respectively, 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 no impairment charges during fiscal year 2014 and immaterial impairment charges during fiscal year 2013.

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Severance and Other Employee Separation Costs - Beginning in fiscal year 2011 and continuing through fiscal year 2014, we have implemented workforce reductions as we reengineer and simplify our business processes, refine our educational delivery systems and reduce our operating costs to align with our reduced enrollment and revenue. We incurred severance and other employee separation costs of $33.2 million, $32.7 million and $12.9 million in fiscal years 2014, 2013 and 2012, respectively. These costs are included in the reportable segments in which the respective personnel were employed.

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Other Restructuring Related Costs - We incurred other restructuring related costs that principally include services from a consulting firm associated with our restructuring activities and fixed asset impairment charges related to software and equipment we are no longer using. The majority of our other restructuring related costs are included in “Other” in our segment reporting because they pertain to all areas of our business.

Because University of Phoenix has closed the substantial majority of the total square feet included in the above plan as of August 31, 2014, we do not expect to incur material charges related to the remaining square feet to be vacated under the above plan. However, we will incur interest accretion associated with the lease obligations in future periods, and we may incur material charges associated with future restructuring activities as we intend to continue our efforts to streamline operations and improve efficiency.