APOL: Apollo’s Students Aren’t Paying the Bills
When we recently reviewed the 10K report for ITT Educational Systems (ESI), we said there were some earnings quality concerns. Among them were “Doubtful accounts – reserve nearly doubled despite a decline in total receivables.” Apparently that is an industry-wide problem, according to this article from Reuters.com:
Apollo Group Inc. (APOL) said on Monday it expected to raise its allowance for doubtful accounts and associated bad-debt costs by about $38 million as it works to complete its delayed quarterly financial report.
The for-profit education provider also said Nasdaq had granted it an extension to file its quarterly financial report.
The allowance increase follows a review of the company’s write-offs in the fiscal years 2000 to 2006 that concluded Apollo’s previous allowance for doubtful accounts was understated.
Apollo said of the $38 million, $24 million relates to years prior to 2006. Bad-debt expense would be reflected in a restatement of its results.
The allowance for doubtful accounts is not the actual bad debt expense a company incurs, but rather an estimate of it. Accounting rules require that expenses be recognized at the same time as revenues, but the bad debts will not be known until several months after the revenue is earned. The estimate, in allowance for doubtful accounts, makes the match.
If the estimate is reasonably close everything is working according to plan. Any differences due to bad debts being either higher or lower than the estimate will be adjusted on the balance sheet rather than the income statement.
However, because it is an estimate there is the potential for the estimate to not be reasonably close. This could occur due to misfortune, poor estimating skill or management attempts to manage reported earnings per share. Investors can monitor the amount charged to the allowance as a percentage of accounts receivable or sales. If the company is accruing less than normal, it will inflate their earnings in the current period.
ITT Educational is a current member of our Small Cap Watch List (Track at Marketocracy), and Apollo is on the Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy).
This case is a little different. They will be adding to the allowance, which reduces the current period earnings. But since the adjustment reflects prior year results it means they were reserving too little before – and that earnings forecasts based on the company’s prior profitability levels are probably too optimistic.
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[...] Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Apollo Group. (APOL) issued the following statement in an 8K SEC Filing: The Company previously disclosed that it intended to file by April 30, 2007, its Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2006, its Annual Report on Form 10-K for the fiscal year ended August 31, 2006 and its Quarterly Reports on Form 10-Q for the first and second fiscal quarters ended November 30, 2006 and February 28, 2007, respectively. While the Company has made significant progress toward the completion of its delinquent reports, it will not be in a position to file by such date. The Company expects to file its delinquent reports as soon as possible and no later than May 25, 2007, the last day of the temporary exception period granted to the Company by the Nasdaq Listing and Hearings Council. We noted recently that Apollo’s students have been late paying their tuition bills. Perhaps they are learning by example. The check, and the 10-Q, are presumably in the mail. For more information, see all articles on: Stock Market, APOL [...]
[...] Bad debt was one of the earnings quality concerns we developed when we reviewed the 10K. Even if management claims it is within historical ranges, the truth is it is still rising. It is also, apparently, an industry-wide phenomenon. Investors should keep a close eye on collections going forward. For more information, see all articles on: Stock Market, ESI, APOL [...]
[...] Analysts were expecting the company to earn $0.14 on $253 million in revenue. COCO’s decline in enrollments contrasts with some of its peers, such as Small Cap Watch List (Track at Marketocracy) and Mid Cap Watch List (Track at Marketocracy) member Apollo Group (APOL) or Large Cap Watch List (Track at Marketocracy) member ITT Educational Services (ESI). However, it does share a less favorable metric with those peers: Educational services expenses were 56.7% of revenue in Q3 07 versus 55.1% in Q3 06. The increase was mainly the result of higher occupancy and bad debt expenses. Bad debt expense was 4.8% of revenue in Q3 07 versus 4.0% in Q3 06. The company issued EPS guidance of $0.12-$0.13 for its fourth quarter, which ends in June. The consensus expectation had been for $0.14. For more information, see all articles on: Stock Market, ESI, APOL, COCO This article is for entertainment purposes only and reflects the author’s opinion. It is not a solicitation or advice to buy or sell any securities mentioned. Always consult a qualified advisor before making investment decisions. [...]
[...] be trying to improve their skills.” But that makes an implicit assumption that those students will be able to pay their bills. Last year, Apollo, ITT Educational (ESI) and Corinthian Colleges (COCO) all reported rising bad [...]