Perdoceo Education Corp (PRDO) 2011 Q4 法說會逐字稿

Welcome to the fourth-quarter and full-year 2011 earnings conference call. My name is John, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. John Springer. Mr. Springer, you may begin.

Thank you, John. Good morning, everyone, and thank you for joining us on our fourth-quarter 2011 earnings call. With me on the call this morning are Steve Lesnik, our President and Chief Executive Officer, and Mike Graham, our Executive Vice President and Chief Financial Officer. Following remarks made by management, the call will be open for analyst and investor questions. This conference call is being webcast live within our investor relations section of our website at CareerEd.com. A replay of this call will also be available on our site. If we do not get to your question during the call, please call our investor relations department at 847-585-3899.

Now, before I turn the call over to Steve, let me remind you that yesterday's press release and remarks made today by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on information currently available to us and involve risks and uncertainties that could cause our actual future results, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. These risks and uncertainties include, but are not limited to, those factors identified in our quarterly earnings release, our annual report on Form 10-K for the year ended December 31, 2011, and our other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments, or changed circumstances or for any other reason. Now, let me turn the call over to Steve Lesnik.

Thank you, John and good morning to everyone out there. Thank you for joining us. It's been an eventful four months since I arrived, and I can assure you of that with some authority. 2011 was a challenging year for post-secondary education, some might say a watershed year. I myself have been heavily involved in higher education for more than 25 years, and there are unprecedented challenges in front of both public, nonprofit, and public sector institutions.

Today we all, to one degree or another, face a challenging landscape in post-secondary education. Whether it be the shrinking of taxpayer dollars available to public sector schools or regulatory change aimed at private sector schools. And these restricting developments are occurring even though the need for post-secondary-educated students in our country has never been higher and never been more out of reach for so many. We are responding to these industry-wide challenges. During the year, we undertook initiatives across the company to adapt, as did our peers. Nevertheless, the downward pressure on student population, revenues, and margins for everyone was readily apparent, and we were no exception.

Our Career Ed institutions also faced some unique challenges in 2011, leading to my arrival here in November, with a clear set of priorities to immediately address. This morning, I'd like to cover a few of those priorities with you. Then I'll turn the call over to Mike Graham, who you all know, who will talk about our current business metric trends and indicators. The priorities the Board and I have adopted, that I'm going to provide you with an update of our progress on, are as follows. First, ameliorate the current legal accreditation and regulatory issues facing us when I arrived. Second, establish a clear strategic path for the Company. Third, address where we are regarding leadership of the Company and our institutions.

Even before we get to those priorities, let me share with you the core cultural values we have emphasized throughout the organization. It's a simple thought, students first. Every decision we make now goes through the filter of how it impacts our students from the moment they consider us for enrollment until the day they graduate. And even beyond, as they progress in their careers. That idea permeates a reaction we take.

Now let's talk about the external issues we face today. You all know we, along with a number of other companies, received a subpoena from the New York Attorney General's Office last year. Discussion between the AG's Office and ourselves are ongoing and we continue to cooperate in every way we can. Nevertheless, I don't think anyone can determine when these discussions will conclude. One consequence of the subpoena was that in preparing to respond, we discovered some anomalies in the determination of placement rates at our New York-based health schools. We quickly informed the AG as well as the accreditors of these schools.

Our Board also mandated a review of placement determination and reporting practices in all our schools across the country. Let me briefly review what has happened since. There's two issues. One has to do with the methodology of our determining placement rates we report to ACICS. The other has to do with the placement rates themselves.

Regarding methodology, which is the issue that led to our receiving a show cause order, there are two aspects we have addressed. First, we have sharpened what we defined as a placement. Second, we are re-verifying our placements going forward. I want to stress emphatically that we did report to ACICS on time and in accordance with their requirements in 2011.

Regarding sharpening what we defined as a placement, we have made a great many enhancements, which I believe propels career Ed into an industry-leadership position. We have written and adopted a new policy manual providing additional guidance on what constitutes a placement for various kinds of schools, which I understand some others have asked to emulate already. We have put in new training procedures, new processes, and added new people, including designating one of our experienced compliance people to lead a career services compliance activity. But the coup de grace is that we have now committed through independent verification of 100% of placements going forward. There is no stronger assurance we can give the accreditors about our placement reporting.

Regarding placement rates themselves, there are various levels of placement rates that trigger various degrees of actions and reactions by our accreditors. For the 2011 period, a number of our ACICS schools were placed on reporting and/or were required to have the schools' personnel attend a placement workshop or were required to consult with ACS as to the school's placement improvement plans. We have done all that, and we are working on improving our placement rates where they don't meet our own high standards or our accreditors' guidelines. Just where we would come out for 2012, I cannot predict. And whether we will trigger any additional actions by our accreditors once we report this year, I cannot predict, but we are doing everything we can to clear this up, and have confidence about the future. One thing I can assure you, while I'm here, we will on a program-by-program basis, by campus, either improve our placement rates, cap new enrollments, into the programs, or teach them out. The current situation will not linger.

Let's turn back to the Company-wide review of placement practices. As previously disclosed, the independent counsel, Dewey & LeBoeuf looked into all of our other domestic schools and campuses. I can tell you this morning that the review is complete, and it did not find instances of improper practices, as were identified within some of our health schools. There were instances of errors and misjudgments in the internal data, which were corrected before we reported in a timely way to our accreditors. We have reported what we should, and it is done. I'm very pleased that we can now put this chapter in our history behind us.

On a different regulatory front, the Company has 90/10 issues to address. Mike will go into some detail regarding this problem. I will just comment that 2012 is a pivotal year for the Company regarding 90/10 issues, currently involving approximately 10% of our revenue. I want to also comment briefly on the Coalition For Educational Success Pledge. We are only one of two publicly-held post-secondary education companies that have signed up to adopt new standards for responsible conduct and transparency. As a result of these standards, all CEC institutions participating in Title IV programs will offer new undergraduate students initially enrolling in a program of study an orientation or a readiness opportunity 21 days long, during which time students can discontinue their studies without incurring tuition expenses.

We will put that into effect sometime during the second half of the year. The readiness opportunity complements programs already in place across many of our institutions to expand the use of testing to assess student readiness to engage in college-level work, and this additional screen could impact enrollments. The important goal of these programs is to continue to improve student success and graduation rates, metrics which are critical to us.

Speaking of the years ahead, I want to talk a bit about our newly-adopted long-range strategic plan. I do not intend to share publicly all our competitive strategy, but I know you'll be interested in some of the broader contours of it. At the heart of the plan is a commitment to simplify the Company. We are a very complicated organization. Our internal structure is highly matrixed.

Our OPID structure includes 26 separate OPIDs across multiple institutions. We have four domestic accreditors. We have 19 program programmatic accreditors. We have 15 institutions and brands, 13 domestic, each with its the its own needs for marketing support and with largely independent operating processes. There are inconsistencies in student-facing activities, including the classroom. Seven of our institutions have their own Board of Trustees in addition to our corporate Board. All of this puts a large burden on our regulatory processes, affects our ability to focus on students, and limits our margin potential, which has historically lagged.

A couple of things are clear as we move forward. Education needs and workforce demands will continue to change, and we will continue to face an evolving regulatory landscape. Beginning last June, we took an important step towards streamlining our regulatory complexity by initiating for our career schools the process of moving toward one national accreditor and one OPID, which would go a long way in streamlining our regulatory processes. But we have a lot of opportunity in front of us to simplify our operations, and we will start by creating a new leadership position in 2012, which will oversee all of our career-focused institutions, including health, culinary, and design education groups. This is the ideal time for this, since the underlying business models of each of these groups are undergoing significant change.

We're also looking at finding ways to simplify the University side of the Company. Reducing our organizational and operational complexity will enable us to focus on building select brands. This leads to another core strategy, which is to establish a small number of strong, recognizable brands like Le Cordon Bleu. We believe the best course to sustainably shift our high reliance on aggregators is to focus on a fewer number of brands that can be supported and differentiated over a reasonable period. We are not big enough to sustain 15 brands in the global educational marketplace we have envisioned ahead, but we are big enough to establish elite brands in our three key adult educator marketplaces, US career-oriented schools, US online universities, and prestigious Western European post secondary schools.

Since I arrived, we have authorized several marketing initiatives that will enable us to strengthen our institutions' standing with prospective students, beginning the essential process of reducing our reliance on aggregators and eventually becoming brand names. This, of course, will take time to take hold, as every marketer knows. This brings us to a third element of our strategy, which is the last one I intend to touch on today. We believe we have a strong core competency and perhaps a distinct competitive advantage in the application of technology to education.

First, our fully-integrated student platform is a model for the industry, public or private sector. Equally important, we have historically been an innovator in creating adaptable learning experiences that greatly benefit our students, with applications like MUSE, My Unique Student Experience in our online institutions, and SIMPRO virtual trainer in our health education schools. Our virtual classroom experience is exemplary, and we will continue to invest and extend its capabilities. We are only beginning to tap into the potential, but we believe that over time, we can differentiate our institutions by providing to our students enhanced learning outcomes through innovative technology-driven education experiences. You will hear more from us on our technology initiatives over the coming quarters.

We have a lot of work facing us to address the regulatory challenges and operational complexities today that are barriers to us reaching our growth and efficiency and margin potential. In view of this, the Board has determined that now is the time for consistency in leadership. It has therefore deferred initiating a search for a CEO. I've agreed to stay on as CEO to at least the end of 2012, and as Chairman thereafter. I'm confident that will give us ample time to address our external relations issues, replenish and reconstitute our senior management team, and begin implementing key elements of our newly-adopted strategic plan, part which I've highlighted for you this morning.

Regarding our leadership team, we have already taken a number of steps to strengthen it. We have promoted Manoj Kulkarni to Chief IT and Innovation Officer, reporting directly to me, emphasizing the importance of technology and extending beyond technology the idea of infusing innovation in everything we do at Career Ed. We have elevated a veteran college president to lead our design group, and we have buttressed our health leadership with one of our most seasoned leaders. We have also reorganized and upgraded our all-important compliance capabilities, and have asked former Assistant Secretary of Post Secondary Education for the Department of Education, Diane Auer Jones, to step in and lead the regulatory affairs. In addition to the career-focused schools Chief Officer I mentioned earlier, we also have initiated a search for a Chief Academic Officer, as well as for other operational leaders to buttress the core team we have in place.

I believe Career Ed has the opportunity and the capability to once again be a leader in post secondary education, where there has never been a greater or more urgent need in America or around the globe for education. I told that to our entire employee population when I outlined our strategic priorities to them earlier this month. I think our people all across the company are enthusiastic about our strategic framework. We know that while the near-term outlook is quite murky, 2012 will be a year of erosion. We think -- 2012 will be a year of transition, we think that outlook is crisp and clear for the longer range future. And we are taking steps necessary to position the Company for the future.

I want to emphasize again I think the longer range prospects for Career Ed have never been clearer, and we will emerge from what is going on today as a stronger Company. Over the long-term, we can build on our quality teaching, our technological advantages, our student-first operations, and our commitment to reducing corporate complexity, brand building, and academic leadership. With that, I'll turn the call over to Mike.

Thanks, Steve. Good morning, everyone. Let me start by reminding you of a few items in the press release and Form 10-K we issued last night. In the fourth quarter, we recognized non-cash impairment charges totalling $188.8 million, or $2.25 per share, associated with our annual impairment testing. In the fourth quarter last year, we booked impairment charges and a legal settlement totaling $68.6 million, or $0.56 per share. All my comments on the remainder of this call will be on the non-GAAP basis, which excludes these charges. In addition, in November, we completed the sale of our European Istituto Marangoni schools, which were determined not to be core to the long-term European strategy. The results from operations for Marangoni our now reported within discontinued operations. And all prior periods have been recast to reflect our reporting on a comparable basis. We have included recasted quarterly P&Ls for 2011 and 2010 in the press release, and Form 10-K, so you can update your models accordingly.

Let me return to a quick overview of our financial performance. Overall in the fourth quarter, our revenue declined 17%, and operating margins came in at about 4.5%, generally in line with last quarter's results. Over the last couple of quarters' calls, we've provided an insight into the number of initiatives we've taken across the majority of the domestic institutions to further student success and better position our institutions to navigate the changing regulatory landscape. The impact of these changes, together with the macro trends in the industry, have had a significant impact on our financial performance in the second half of the year. Given the number of changes in the business models, the new strategic imperatives which we will execute against in 2012 as Steve just spoke to, and the final outcome of solving the regulatory challenges, today we'll continue our practice of not providing specific earnings guidance.

Due to the complexity of our reporting structure and business model, I decided it would be informative to use my time today to qualitatively calibrate you to the major trends impacting each of our institutions, and how these trends impact the trajectory of the business, heading into 2012. First, for our predominantly online institutions, AIU and CTU. In general, AIU and CTU are dealing with challenges similar to many in the industry. We're experiencing lower conversion rates, lower enrollments per admissions advisor, which is leading to higher costs. Our relatively high degree of reliance on the lead aggregator channel makes impacts to institutions more pronounced to these changes than to most.

These impacts are a result of the new student start decline throughout 2011, which accelerated following the third quarter of limitation of SOAR, our Student Orientation and Academic Readiness course. In the fourth quarter, new student starts declined 26% in AIU and 22% in CTU. Excluding the impact of SOAR, new student starts were down 17%, and 15% respectively. Based on conversion rates exiting the year, we expect similar performance to the first half of 2012.

Turning to margins, throughout 2011, we kept the variable expense structures within these institutions in line, with the declines in student population. However, as the rate of student population decline accelerated through the year, we experienced negative operating leverage from two primary factors. First, our advertising and marketing spend, which is generally level-loaded throughout the year, and second, the operations of our 10 ground campuses. As a result, in the fourth quarter, CTU's operating margins were 25.4%, down 670 basis points from last year's fourth quarter, reflecting a 19% decline in student population and an 18% decline in revenue. Within CTU, we will be investing in branding initiatives in 2012 to begin shifting the lead mix more meaningfully away from the aggregator channel. We completed successful testing of our approaches in the back half of 2011 and we're optimistic about the opportunity.

Turning now to AIU, in the fourth quarter, AIU revenue declined 22%, reflecting a 15% decrease in population, and continued revenue per student pressure due to lower average credit loads. Operating margins in the fourth quarter were 8.2%, as compared to 23.2% in the fourth quarter of 2010. In our career-focused institutions, the changes have been more pronounced. Together, these institutions reported an operating loss of $13.5 million in the fourth quarter. Based upon this performance, as well as the additional challenges ahead, we would expect similar levels of quarterly operating losses throughout 2012. This would exclude impairment, legal settlements if any, and other unusual items.

In culinary, the levels of new student inquiries held up relatively well, with new student starts down 4% in the fourth quarter. However, the business model shift towards the certificate programs, which was completed heading into the third quarter, has resulted in revenue per student declines of over 25% in the back half of 2011. On the cost side, the new model has resulted in significantly lower bad debt expense, offsetting approximately 50% of the revenue per student reduction, and we continue to drive efficiencies across the controllable part of the cost structure. Despite these efforts, the high fixed-cost nature of culinary, particularly with occupancy costs, has resulted in significant negative operating leverage. In the fourth quarter, culinary operating margins were a negative 2.5%, down 780 basis points from last year. Looking forward, we'll anniversary the business model change in the second quarter 2012, and it will take time to build the student population enough to offset the decline in RPS. So we expect to experience continued margin pressure in culinary throughout 2012.

In art and design the 2011 challenge has been more about the overall new student interest. Volumes of new student inquiries and conversion rates were pressured throughout the year, resulting in new student start declines of over 40% throughout the last three quarters of the year. As a result, fourth-quarter revenue for art and design was down 19%. Operating expenses in the fourth quarter included a $6 million charge for an increase to litigation reserves. Excluding this charge, total operating expenses were down 10% from last year's fourth quarter, and operating income was slightly above breakeven. As discussed on the third-quarter earnings call, we are rolling out significant changes in the art and design business model, which includes new curriculum, changes in term structure, and adjustments to tuition levels. Unlike culinary, these changes are not expected to lead to material reductions in revenue per student, but 2012 will be a year of transition for art and design, as we implement these changes.

Now onto health, which we believe will have our biggest increment of challenge heading into the year. As noted in the Form 10-K filed last night, we notified the Department of Education in February that we believe six of our OPIDs had 90/10 rates above 90%, for fiscal 2011. These six OPIDs are within our health education group, and our Sanford-Brown institutions in Atlanta; Boston; Farmington, Connecticut; Fenton, Missouri; McLean, Virginia, as well as Missouri College in Brentwood, Missouri. These six OPIDs contributed approximately $180 million of revenue and $12 million operating income for fiscal 2011. We have been implementing a number of measures, including tuition changes and increasing non-Title IV revenues to work to align these institutions under the 90% level for 2012.

In addition, as we mentioned on last quarter's call, as we move into 2012, we are undertaking a number of operational initiatives aimed at improving our placement rates at all our schools accredited by ACICS and other institutions. These include capping new enrollments for certain programs, teaching out certain programs, and increasing career services personnel staffing levels. We've also repositioned resources throughout the Company to assist in addressing these challenges, including moving Jason Friesen into the health education group as our business later. Additionally, the underlying business performance continued to weaken in the fourth quarter.

Health new student starts were down 30%, reflecting ongoing declines in both new student inquiries and conversion rates. At the end of the year, health student population was 17% lower than last year, resulting in a 16% decline in revenue and an operating loss of $6.3 million, which reflects deleveraging across our legacy campuses, as well as a slower than anticipated ramp-up of our 15 start-up campuses opened over the past four years. We have a lot of work to do in health to navigate these current challenges, but as Steve mentioned, each of our career-focused institutions is dealing with significant business model changes. We'll be bringing them together under a single leadership structure to bring better scale and new growth opportunities to the operating models.

So before we open up the call to questions, let me quickly update you on the financial position. As of December 31, 2011, the Company had cash, cash equivalents, and short-term investments of $441 million. Our cash flow from operations for the three months ended December 31, 2011, was approximately $21 million. Capital expenditures in the year were $78.3 million, or 4.1% of revenue. And during the fourth quarter, the Company repurchased 1.8 million shares of our common stock for approximately $13.4 million. As of the end of December, the Company had remaining share repurchase authorization of $239.8 million. With that, operator, let's open up the call for questions.

Thank you. (Operator Instructions) Our first question comes from Gary Bisbee from Barclays Capital. Please go ahead.

Can you give us any color on the level of spend associated with the placement rate investigation and the effort to remediate those issues? And secondly, any sense how long that level of spend will continue or persist into 2012?

I think it would be inappropriate to give a lot of detail, but let me give you a couple pieces of color. We've dramatically increased the number of career services personnel. As of January 31, our career services personnel were about 10% higher than they were the year before. And if you look back to December of 2009, we probably have about 60 to 70 more career services personnel in the Company. During the quarter, we did expend legal costs related to Dewey & LeBoeuf. Dewey & LeBoeuf expenses will continue, obviously, as they help us with the New York Attorney General work in 2012. But beyond that, in terms of the costs, the remaining costs are part of the cost of doing business, and the cost of operating our model.

Were there some other areas that stand out within the G&A line this quarter? That line bumped up a lot. Or is it safe to say a lot of that is this incremental stuff?

I would also point you to two things, in addition to what I spoke of. One would be -- we do have $5 million of severance costs related to our change in our CEO, and the retirement of another executive. Additionally, we did increase our litigation reserves about $6 million within art and design. So, those two items, about $11 million would also be something to analyze.

Okay. And then just the last quick one -- your comment that the career schools' losses would remain similar throughout 2012. Should we back out of that, the $6 million litigation reserve? Or is there likely to be other one-time stuff like that that's going to keep popping up this year? Thank you very much.

Thanks, Gary. I wouldn't -- we don't anticipate other costs, in terms of litigation settlements or other things. That said, we can't tell. I would anticipate operating losses someplace around the level of $15 million per quarter going forward.

Great. Thank you.

Our next question comes from Bob Craig from Stifel Nicolaus. Please go ahead.

Regarding the long-term strategic plan, thanks for some of the input there. I was wondering if you could provide a little additional color in terms of number of brands. You said 15 potentially going to how many? And will that plan likely include further divestiture?

This is Steve. Regarding how many we'll go down to, we look at three spheres, as I mentioned -- the University sphere, we'd like to go down to as few as possible there. Obviously, the ideal might be one, but there might be more than one on that side of the business. The second sphere, our career-oriented schools, we would envision certainly maintaining Le Cordon Bleu, and probably go down to as few as we could beyond that. And thirdly, we have our international schools that we look at a little bit separately. We are down to two over there. So, we would like to get down to as few as practical, so that we can support them in the marketplace.

Okay. And likely divestiture?

We're always considering acquisitions and divestitures. It's just sort of a routine part of the business. We're always doing that kind of analysis. We are, however, thinking as much about consolidation and uniformity as we are perhaps of divesting anything.

Great, and one more question. I noticed in the K that your rep force and faculty count were down about 3% year-over-year. I guess I would have expected that to be down a little more -- and total employees down about 6%. Have you -- I guess a bigger picture question, have you sufficiently right-sized the organization in terms of employee count, or could we see further action there?

We're always looking at that as well. But I would just remind you, that has to do with the complexity of our organization. Our ability to right-size as quickly as we would like to, or one might expect, is hampered by the complexity of our business, and how many moving parts we're dealing with, and the metrics nature of some of the functions that we perform. So, we are, of course, looking at that as we move ahead, but it's not as simple and straightforward as it might be for some others.

Bob, the other thing I would point you to is the rep force count is also a point in time, if you looked at the average rep force for the fourth quarter, we were down to about an average of about 1,900 reps for the quarter, about 15% down.

Great. Thanks for the color, guys.

Our next question comes from Jeff Mueller from Baird. Please go ahead.

I was just wondering if you guys would be willing to provide any order of magnitude of what the temporary relief in terms of the $2,000 from the Stafford loans had on your consolidated 90/10 rate in fiscal 2011?

Sure. I think a couple things. One, from a consolidated rate, with 26 OPID structures, it's not very meaningful, as you go across the business units. We had talked during previous quarters' calls that certain of our health units would be exposed to 90/10 as the $2,000 of Stafford kicked over as of July 1. From an overall Company standpoint, our Title IV revenues per year were approximately 83%, so not near the 90/10. So, the 90/10 issue as we spoke about was in these six OPIDs. As we go forward through 2012 for the ground schools, we will have more pressure against the remainder of the ground schools, especially in health. But looking at the $2,000 across all 26 OPIDs, would be more meaningful than consolidated.

Okay. And then you guys -- I guess this is a follow-up on the last question about consolidating the brand, but you talked about investing in CTU in the 10-K, and then on the call again today you talked about the branding initiatives there. Any reason for the emphasis on CTU over AIU, as you look to consolidate brands? Just wondering how you're thinking about that.

I wouldn't read anything more into it than it is. We did make a commitment to both schools to initiate branding activities. The CTU branding initiative is through a more conventional -- what we normally think of as conventional media, while the AIU initiative is more innovative, and largely targeted at social media. So, we are trying some different things in both of the schools to see how it works. We think, we've tested both, we think both are likely to have legs for 2012, and I wouldn't read anything more into one over the other, as far as which way we're going to go, in terms of simplifying the university side of our business.

Okay. Thanks. And then just finally, you guys talked about discussions with your other accreditors other than ACICS in the 10-K. I guess if you could provide any color there, did you approach them? Did they approach you? To the extent to which you're willing to, how would you characterize the discussions?

I would say both. I think in some cases, probably in all cases, we initiated reporting. As I said on the last call, we are very transparent about what we're doing. As soon as we have found anything, we have reported it. And we have continued to do that into the year.

The other accreditors obviously are curious, like everybody else, about what is going on in the Company. And we think it's in our best interest and their best interest for us to report as fully as we possibly can to them as to what's going on in each circumstance, so that nobody is caught by surprise. And it's in the interest of transparency and no surprises that we have maintained dialogues with all of our accreditors about the issues we've been facing here over the past several months.

Thank you.

Our next question comes from Suzi Stein from Morgan Stanley. Please go ahead.

Can you give us an update on what the two potential non-compliance issues are at CTU from the OIG report? And how you plan to address them?

Sure. There's two issues. One is related to attendance-taking, last day of attendance, and another one is a smaller issue related to certain financial aid elements. The financial aid elements are very small issues, and we'll take care of those in due course.

On the OIG report, as you know, this has been ongoing with the OIG for a matter of time. The OIG has asked us about how we calculate the last day of attendance. We have responded -- or we will respond back to the OIG by tomorrow with our response. We responded back, that the way we do it is exactly the way we understand most traditional institutions do it in an online-setting, as well as most of the for-profit proprietary institutions. And is very much in line -- the way we do it is very much in line with the Department's guidelines as of July 1, and what the Department mandates for last day of attendance.

Okay. And then separately, the campuses that you're facing 90/10 issues, how much more of a challenge will it be at these particular schools to comply with GE, just given that one strategy is to raise tuition? Is that a viable long-term strategy to address that issue?

It's always a pressure. You have the needle between 90/10 and gainful employment that you have to thread. Right now, we have looked at tuition levels and raised tuition levels. More importantly, we have looked heavily at other sources of non-Title IV revenue. Non-Title IV programs, short programs, third-party reimbursements for students including scholarships, grants, corporate reimbursement. So, it's a comprehensive program to look at many things besides just the tuition level. But that said, the government mandates creating gaps for the student, not necessarily in the best student's interest to raise tuition, but we need to do that to follow the regulations. We'll work to work through 90/10 here, and we'll look at gainful employment next as we get through that.

I'd just like to emphasize that the first hurdle here in this hurdle race will be the 90/10, and then the second hurdle beyond that will be the gainful employment. But we have obviously begun to measure just how fine a line we're going to have to walk, in order to make sure that we meet both. And in cases where one or the other have to give, and we have to take actions to deal with the first hurdle, that's what we're going to do.

Okay. And then just a final question, have you seen any material change in competition from traditional schools over, say, the last two months or so?

I would say that there has been a lot of discussion about that. There's a lot of conventional wisdom out there about that, but we have not seen, in any quantifiable way, additional pressures from the traditional schools. However, there does seem to be a quickening of interest in online teaching in the traditional schools. When I was Chairman of the Illinois Board of Higher Education, there was a very substantial resistance to distance learning by a variety of interests on the public sector side. That resistance is beginning to dissipate some, as the effectiveness of online learning is becoming more established, and there's more data on online learning. And secondly, as the students, particularly adult students, find online learning conforms better with the modern lifestyle.

Great. Thank you.

Our next question comes from Jeff Silber from BMO Capital Markets. Please go ahead.

You talked a bit about the potential to consolidate some of your OPID numbers. Can you give us a little bit more color on the process, the milestones, and how easy and/or difficult that might be?

I can't give you much more insight into it. We have discussions going on with both the Department of Education and our accreditors. I think to the extent that we have established that simplifying our organization, making it less complex, more consistent, more consistent in student-facing activities, everybody sees the rationale for doing this. It is a matter of the Department of Education at this point, adjudication -- reacting to this and taking the appropriate steps to confirm it.

I know the discussions have been going on since last June. Have they given you any indication in terms of timing of a decision?

They have not given us any indication of timing. Obviously, we would like to get it done sooner rather than later. But the Department of Education is also a big, complicated organization with lots of moving parts. And hopefully, we can get this done as expeditiously as possible.

Okay. And then moving on to the meetings with the ACICS, I know in your K you talked about how they have deferred their decision until their next meeting in April. Is that something that's going to be released publicly? If you can give us a little more color in terms of the dialogue going on there, that would be great.

I don't know what you mean about released publicly, but they will certainly tell us at some point after the meeting in April, whether the show cause will be modified in some way, continued, discontinued, they have a range of actions they could possibly take after the April meeting. And I feel confident that either they or we will publicly announce the outcome, if there is one. If there's not, there could be just a continuance of what is going on as well.

All right. Great. And then just a few numbers questions -- Mike, can you tell us what we should be budgeting for capital spending in 2012?

I would anticipate someplace around 4% of revenue, with the reduction in revenue that we'll experience in the year, based on the 2011 trend. We still want to invest in the students and into the campuses, as well as technology, so it will probably be 4% or so.

All right. And then in terms of the current quarter, besides the extra day, is there anything unusual that we should be aware of including comparisons to last year? Thanks.

Nothing significant. Obviously, you do know that within our AIU institution, we have some seasonality in the fourth quarter versus other quarters based on the number of days of attendance, but nothing else would stand out.

All right. Great. Thanks so much.

Your next question comes from Corey Greendale from First Analysis. Please go ahead.

Question about the placement rate issue. You talked earlier about some of the conversations you've had with other accreditors. Could you also just comment on the nature of the discussion with the Department of Education? And in your comments, Steve, I think you said something about that it's good to put this chapter in the Company's history behind you. Can you just give us some sense as to what gives you the confidence that book is closed, that there aren't additional ramifications down the road from the Department of Education or states or anything?

I can't imagine that there will be additional ramifications from anyone on this. We conducted an internal, independent investigation of our placement practices. We found some things in some of our health schools that we announced publicly, and we announced to regulators and others. The rest of the review didn't turn up anything to report to anybody, and there haven't been and there won't be a need for any further conversations with anyone about it.

Okay. And secondly, another question for you, Steve. I understand you've committed to being the CEO through the end of this year. Is there a scenario where you could be the CEO for five years, or should we not be thinking about it that way?

Have you been talking to my wife?

I'd rather not discuss that publicly. (laughter)

I'm not going to put any time limit on how long I stay. I think first of all, it has to do with the Board of Directors and what the Board of Directors think is the best course for the Company. And they are watching very, very closely. And I will stay until we get the three areas that I've described to you this morning on the right track, and some lift and forward momentum going. And that is getting these regulatory issues, accreditation issues and other reputational issues that we inherited resolved. Getting the leadership team in a very strong position. And importantly, getting some momentum on the strategic plan, which we have adopted this year.

And can you just give us a sense, just your sense for CEC's reputation in the industry at this point, in terms of just given where the Company is at, are you finding it more challenging to attract good talent given the changes? Is it getting easier, or just what's the status on that?

First of all, two questions. In the industry, and generally with respect to talent, I think that we still have the respect of our peers. I think our peers recognize that there are a lot of good assets here. There's a lot of good institutions, good people. I think our technological advantages are very well known. I think the strength of our financial organization, and frankly, our teaching core is respected by our peers. So, I think our standing in the industry continues to be very strong, and I think personally, there's a lot to build on here.

With respect to a more general reputation, we, like many of the other companies, have taken a good many hits, both in Washington and in some of the general media over the past year. We're certainly no exception. And more recently, we've been a little bit more in the limelight than we would like. We have a search firm on retainer that is looking for some of the people that I described to you. And frankly, they're having very good reception.

I think people recognize the importance of education, the opportunity for higher education, the need for higher education. I think it motivates, it is very attractive to some people to do this kind of stuff. And we're finding the caliber of candidates who are interested in the Company to be pretty good. Is that responsive?

That is. Thank you very much.

Our next question comes from Trace Urdan from Wunderlich Securities. Please go ahead.

Given the revised downward placement rates at some of the healthcare schools, I'm wondering if any of those you would consider potentially at risk for closure? Or at this point, are you comfortable that none of the schools will need to be closed?

As I said in my prepared remarks, we will either fix them, teach them out, or in some cases, cap enrollment, if closure is another word for teaching them out. We're not going to leave any students in the lurch here. But as I said in my prepared remarks, we're going to do one of the three things, either fix them, cap them, or teach them out.

Thank you. And then with the Italian school, can you tell us if that was a sale process? Did you put that school on the market? Or was the bid unsolicited? And if it was unsolicited, have you received any other unsolicited bids for other assets in the Company?

All the time. (laughter) We look at the Marangoni asset as part of our portfolio, well before the closure obviously last November. The Marangoni asset was not integrated in our European platform. The core curriculum of fashion design, the degrees offered did not support our European work in business and IT and health and in publicity. And the owner that came to us, we believe was a much better owner long-term for the brand and for the students. We're not going to comment on M&A activity, but as Steve said, we have a great collection of assets here at the Company. And it's not lost on people that there's a lot of value in this Company right now.

Okay. And then last question, I'm assuming that the Board -- if you guys are buying $60 million worth of stock in a month, that you must have already made some kind of assessment as to what your potential liability could be around settling with the New York AG and the other states in which you're operating the healthcare schools. I'm wondering if you can share with us how you're thinking about that potential liability?

Sure. I think -- we think about the buyback as we always have, which is first and foremost invest in the business, which we've done. We said in the third quarter call that the repurchase that we did was the returning of the proceeds of the Marangoni sale and the completion of the buybacks from the year before, versus anything incremental. So, the shares we bought back were the continuation of that process. As we look forward, we always look at our shares as an opportunity to invest, but first and foremost, sound balance sheet, reinvest in the business, and make sure we pass the DOE ratio. Remember, the DOE ratio as we deleverage and profitability falls will be important, and international operations don't count against the DOE ratio. So, we're very mindful on our buybacks with the DOE ratio as well.

Thanks, Mike. But what about the New York AG? I presume that you're thinking there must be some kind of a financial settlement that you're going to have to arrive there. Given that you guys have already acknowledged that the placement reporting was not accurate.

We don't know what the outcome of that will be, and we're not going to speculate publicly or in any other forum about what the outcome of that might be.

Okay. Thank you.

Our next question comes from James Samford from Citigroup. Please go ahead.

Just a couple comments here -- or questions. You commented that conversion rates and productivity were down, and I think one of your competitors today talked about an improving economy as one of the headwinds that's growing here. I was wondering if you're seeing any kind of counter-cyclicality component as a drag on growth?

I think with the number of changes that we spoke to on the call between the model changes, the implementation of SOAR, the implementation of testing and entrance exams across almost all of our institutions domestically, to try to single out that as a factor in conversion rate would be very, very difficult. I think we're experiencing what everyone else is experiencing. If there is some counter-cyclicality, especially in the online businesses, we would have our proportionate fair share, if that exists.

That makes sense. I was impressed with the international side, once you exclude the international piece. Is there anything -- what was the organic growth rate there, maybe ex-FX? And was there an acquisition component to that as well?

The international -- what remains an international piece is our great institution of INSEEC within Paris, and then the International University of Monaco -- that is all organic growth. There have been no acquisitions in there, and the start and population detail is laid out for the quarter and the year right in the K.

That's great. Thank you.

Our next question comes from Patrick Elderby from Credit Suisse. Please go ahead.

Hi, thanks, it's Patrick for Kelly. Can you share with us any color on the draft two-year default rates you received yesterday, and expectations for the three-year rates, where those might come in?

Yes. We received the data last night; we're currently analyzing it. As you know, with 26 OPIDs, we need to do the work. Our forecast said that our rates would be down probably about 200 basis points to closer to 14%. And also that we would have no institutions from a forecast standpoint being over 25%, so we're in good shape there. We don't expect that the details will be different, but we'll go through that and we'll publish the rates as appropriate on an 8-K later when we have the data done.

It's too early to comment on the three-years right now in terms of the preliminary, but the preliminary drafts that we shared before had no institutions at the 40% level.

Okay. And then just a quick clarification. In the press release, there was a new footnote under starts for AIU and CTU that a student isn't counted as a start until they complete SOAR. Can you just clarify if that's a change versus how those students were accounted for in Q2 and Q3?

In Q2, the SOAR program didn't exist, we had only one small cohort in CTU. In the third quarter, that's how we accounted for them. Basically, we don't know upon the start of the student whether they will complete or not complete, so we basically internally record it as a start, and then a negative start when they don't complete the program. So, it's a really net start basis, and it's been comparable throughout the entire program.

Okay. Thank you.

Time for one last question.

Our last question comes from Peter Appert from Piper Jaffray. Please go ahead.

This is George Tong for Peter Appert. You mentioned earlier that you are not seeing additional pressures from traditional schools, aside from a bigger interest in online offerings. Are you seeing heavier competition from for-profit institutions? Just want to get a sense of whether that's translating into longer decision cycles, and how CECO is working to differentiate itself?

We are seeing a certain change in the decision cycle of applicants, people considering us for enrollment. We are seeing that, and we are seeing people having more intentionality when they come into contact with us, and consider us for enrollment. We are finding that people have -- are more aware of certain brands than they were in the past, and aren't quite as blank a state as they were. We are doing a very considerable amount of research into what we call the purchase dynamic, and are working on becoming more efficient in this area.

We are also, as you know, putting more money into branding so that the intentionality is intended for us, that there is an intent to purchase for us by a greater number of applicants. So, we're working very hard to differentiate ourselves in this area, because of the changes that we're seeing among prospective students.

Got it. And you had mentioned the new screen, the 21-day orientation program will have an impact on enrollment, obviously. Do you have more color on that? And what the magnitude might be impacting enrollments?

It's very early to tell. The impact this year, if we adopt in the second half of the year, and it's only for new students, you'll see the impact not through the revenue side of the financial statements, but probably from a start metric standpoint. We've got a lot of work to do to get our IT systems ready, our student disclosures ready, make sure the process of drawdowns with the Department and everything else aren't tied up, so we won't be doing this until the second half of the year. To be seen, it will obviously affect reported starts, but to the extent that those starts don't persist through the class, or don't persist through the second class, the financial impact is muted. This is about getting quality students in and making sure we do the best thing for the student, not about the financial metrics.

Great. And last question, I just want to get comfort around impairments, and whether we've seen all the major impairments behind us going forward, and whether the abnormalities with the tax rate will persist?

I would say two questions there. Obviously, impairment is in annual testing, and more frequently it's dictated by the accounting rules on a triggering event. One always has to look at that, and there can always be more impairments depending on where the future cash flows of the business are forecasted, and forecasting is a difficult process to do. So, there could be impairments in 2012 and subsequent years.

Tax rate -- most of the write-off of the impairment was not deductible for tax purposes leading to a very strange tax rate. As you look forward for next year, in 2012, I would think about our domestic tax rate being somewhere between 35% and 37%, and our international tax rate being somewhere between 15% and 20% as you build the model into two separate businesses.

Perfect. Thank you.

Okay. I think we're a couple of minutes over here, so I'd like to wrap this up. I think you've heard that the last few months have been pretty eventful, but more importantly, I hope that we have conveyed to you today that 2012 is going to be a transitional and somewhat difficult year for us, but I am at least confident that we are headed in the right direction for long-term success and solidification of our business.

Thanks so much for joining us today. We appreciate your continued interest in Career Education, and we look forward to getting to know some of you better in the future. Thanks so much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.