Perdoceo Education Corp (PRDO) 2012 Q3 法說會逐字稿

Welcome to the Career Education Corporation's third quarter 2012 earnings conference call. My name is John, and I'll 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. Matt Tschanz. Mr. Tschanz, you may begin.

Thank you, John. Good morning, everyone, and thank you for joining us on our third quarter 2012 earnings call. With me on the call this morning are Steve Lesnik, our President and Chief Executive Officer; and Colleen O' Sullivan, our Senior 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 the investor relations section of our website at careered.com. A replay of this call will be available on our site. You can also contact our investor relations department at 847-585-3899.

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 Section 21E of the Securities Exchange Act. 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 those factors identified in our annual report on Form 10-K for the year ended December 31, 2011 and our quarterly 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.

Thanks, Matt. Thanks very much. Good morning, everyone. We appreciate all of you joining us today. I'm going to apologize in advance. I have a little raspy throat, a little cold so please bear with me.

I'd like to begin by introducing Colleen O' Sullivan who joins us today on her first earnings call in her new role as Chief Financial Officer. Colleen who previously served as our Chief Accounting Officer for 4.5 years is a key member of our senior management team. We have a great combination of new and old faces, and our newly established executive committee is a mix of fresh perspectives and approaches with existing deep knowledge of post-secondary education as well as the intricacies of this particular organization. We're all very pleased to have Colleen on the team, and I'll turn the call over to her in a few minutes to talk about the results of the third quarter.

I've been here almost exactly a year. You may recall that when I arrived at the end of 2012, I said this year would be a year of transition for both the sector and for Career Education. That turned out to be an understatement. In fact, the year wasn't just transitional, it was transformational. In our judgment, those companies and institutions that haven't or don't transform will see the shrinkage of the past two years continue, if not accelerate, well into the future. At Career Ed, we believe we are in the process of making the changes necessary to be a sustainable educational organization, providing post-secondary academic and vocational education where it's needed most here in America as well as in Europe through our premier institutions there.

When I arrived last year I said to you that Career Ed needed to immediately address three critical areas. First, we needed to rectify the placement and related issues that arose last year and the year before. Secondly, we needed to strengthen the breadth and depth of our operations and staff leaders. And third, we needed to adopt a long range strategy. We've done all three which I'll talk about in a moment. And there is no question at this time that we are on the right long-term path in my judgment.

However, the deterioration in operating results in 2011 and 2012 has raised the stakes on achieving improved financial results. Even as we pursue our long range strategy, we need to adjust to the current environment and make expedient adjustments right now. You all saw the operating results we reported last night. They reflect the fact that the inflection we all expected in the second half of the year has not and will not occur.

So let me first turn to the present and the immediate future and then talk about the longer term. To address the here and now, we're doing the following. While we are already down approximately 1,300 positions year over year as we sit here today, we've made the difficult decision to eliminate approximately 900 or so more positions between now and January. They will be across our domestic campuses as well as the campus support center where we use for our corporate headquarters. This action is a result of further simplifying the organization through the implementation of standardized operating structures, increased efficiencies, and how student support services are provided, and eliminating some remaining redundancies across the organization. This workforce reduction is not only focused on insuring our cost structure aligns with the current levels of student population, but also represents a change to the underlying operating structure of our ground campuses, most notably within our career schools. The eliminating positions will affect current employees as well as unfilled positions.

In addition, we made the equally difficult decision to teach out, meaning gradually close, 23 of our domestic campuses. This decision furthers the Company's strategic imperative of investing in a smaller number of ground-based campuses and focusing on those locations that have the strongest likelihood of delivering strong student outcomes, operational efficiency, and strength in the market. Consistent with our commitment to students, we will work with each of the campuses affected to insure each of the existing students are afforded the ability to complete their course of study without any interruption. We believe that executing against these strategic imperatives will provide the platform for which to return our business to sustainable growth over the long-term.

Now let's turn to the three priorities we established when I came, improving compliance, improving organization and leadership, and adopting a long-term strategy. First compliance. Today, I believe we've made tremendous progress in creating a culture of integrity and compliance. We now have a former Assistant Secretary of the Department of Education heading regulatory and accreditation affairs. We recently added a senior attorney from another very highly regulated company, Eli Lilly, to lead our ethics and compliance department and to serve on our executive management team. We've also resolved several issues that emerged earlier in the year such as the VA Administration audit involving housing allowances for online students. As we've discussed previously, we had set aside reserves for this matter, protecting our students' interests and insuring that they faced no financial obligation.

Importantly, both CTU and the VA through this process and ongoing dialogue have reached an agreed upon framework for moving forward. I think that reflects our newfound attitude about partnering with external regulators and a creditors. Also, our reversal of our OPID consolidation initiative has resulted in better dialogue with the Department of Education as well as allowing for some program and other approvals by accreditors. Those are just a couple of initial examples of progress with regulators. Hears another example of our progress. As you know, in 2011, six of our OPIDs did not pass the 90-10 test. As a result of a wide array of initiatives this year, we expect all of our schools will pass in 2012.

The last update on our progress in resolving regulatory accreditor affairs involves our placement issues. As you know, we discovered and reported that there were problems with our placement determinations in 2011 and dating back earlier. We have previously explained the remedial actions that we have taken, some of which I'm proud to say are industry standard setting. We believe that we have addressed this issue comprehensively. As you know, the show-cause order place the upon the Company by ACICS as a result of those earlier placement determination issues was vacated earlier this year.

Our second issue was relatively low placement rates at some of our schools from the period of July 2010 through June 2011. This years reporting period has just ended and we are submitting our placement rates for July 2011 through June 2012. The data we reported reflect the over -- the data we are now reporting reflect the overall impact of the measures we have taken in the past year. Prior to implementing changes to our placement practices and policies at the outset of this year, we saw a slower rate of placements in the second half of 2011. Once these measures were in place, our placements have shown market improvement for this year.

Turning to leadership, I can report that all senior management slots are filled. We have a senior management team that, as I mentioned, has complementing backgrounds and talent and who have played a critical role in developing our new long-term strategy. Let's talk about that strategy which has been approved by our board of directors just a month or so ago. As I've said a number of times, one of our first orders of business is to simplify the organization. We simply have too many brands, too many schools, too many OPIDs, too many programs, and not enough uniformity, scalability, singular student focus, or efficiency. So we moved from six education groups to three, university education, career school education, and international.

On the university side, our strategy calls for maintaining our two universities, Colorado Tech and American InterContinental. We have addressed the tradeoffs associated with consolidating into one university, and we determined that the best approach was to continue to operate as two universities. Going forward, AIU and CTU will focus on very different market segments, the understanding and needs of which are based on detailed and proprietary research we have completed. They will implement technology and process changes to personalize the student experience.

They will both utilize new tools such as adaptive learning, which I will talk about in a moment or two, to enhance the learning effectiveness for each and every student. They will vary the level of service based upon what our student segments have told us they are each looking for. For CTU, it will be a higher level of service and support. For AIU, our focus will be on better enabling our students to efficiently and completely and effectively complete their degree. And importantly, each school will have its own distinct pricing structure.

Now let me spend a minute and talk about adaptive learning, another area that we expect to have a positive impact on our university segment in 2013. On our last call, I mentioned that our investment in technology, which has kept Career Ed at the forefront of educational applications, was yielding another advancement. While the term adaptive learning has been bandied about for some years, we are now well underway in a test of a digital teaching modality that can ascertain and adapt to individual learning needs. It can adapt lesson or teaching offerings to accommodate an individual specific knowledge level as well as their unique strengths and development needs within a particular course of study. This learning technology recognizes and addresses that any given student has his own or her own individual strengths, knowledge, and readiness, and adjusts the content and timing on the fly to match these individual characteristics.

In early pilot testing the personalized learning technology has already shown its efficacy. Assuming the remaining pilot period is successful, we plan to introduce this new teaching technology into our university curriculum into the second quarter of 2013. If this approach proves its effectiveness in widespread use, it has the potential to solve the dilemma that different people in the same course learn at different pace and at different levels of incoming knowledge. For example, a more proficient student will move further along in the curriculum, bypassing lessons that cover areas already known to the student.

Conversely, if a student demonstrates less proficiency, the learning technology will direct that student to a place in the curriculum where more basic areas are covered initially, moving to more advanced areas as the student demonstrates greater and greater readiness and proficiency. Our interdisciplinary team of educators and IT leaders are collaborating on this technology which we refer to as personalized learning because that is what it creates for each and every student. We believe it will give our students an edge. We believe more of them will be successful in school and better prepared for the employment in their field of interest upon program completion.

Now turning to international education. We expect to grow this business at a steady pace. We plan to continue operating in our current locations, but plan to expand to other geographic markets. Our primary brand abroad, INSEEC, remains a highly coveted post secondary degree in Europe. The International University of Monaco also looks to expand, and also for the first time is leveraging online technology. This year, we introduced exchange programs with one of our American schools, which give both our European and our American students a chance to respectively study abroad.

We now turn to our third business, our career schools, which were formally three independent education groups, culinary, health, and art and design. As part of our strategy, we are more comprehensively addressing and integrating services across the entire student lifestyle, from enrollment and orientation to job search and placement support. Our goal is to no longer put disproportionate emphasis on starts and population. Our goal is not only to provide high quality career focused education, but to evaluate whether there are identifiable employment needs that coincide with our program offerings and students' education.

In determining which schools would be the building block of our new strategy, we considered a number of factors, including geography, our facilities, quality of the faculty and administration, and sound accreditation. As a matter of fact, close to 50 criteria were used in evaluating which campuses to perpetuate. Importantly, we have as a key criterion, our ability to match the career interests of our students with employer demands in the marketplace. We expect to rebuild our career institutions around a more limited number of school brands like Le Cordon Bleu.

In 2011, our culinary school discontinued its associate degree program which ultimately led to fewer enrollments. As part of our growth strategy for career schools, we have re-instituted the associates program at Le Cordon Bleu and have started those classes already at several campuses. We expect retention and graduation performance to remain at least steady, and in time to improve with this longer more comprehensive program. We believe this offers greater choice and flexibility for students, and already see that it is in some demand. It also further prepares them for a more progressive career in the culinary arts. As part of our strategy, we also have plans to grow Le Cordon Bleu through other initiatives such as enthusiast programs and serving more international students.

Our art and design group comprised of Harrington College, IADC, Collins College, and Brooks Institute will expand beyond its roots in art and design. We will build on the existing infrastructure of staff and facilities. Over the coming years, our strategy calls for consolidating these institutions and brands where it is appropriate to do so. As these plans evolve, we will reach out to all of our key stakeholders from students and alumni to accreditors and importantly to employers to insure our decision making is sound.

Lastly we turn to our health unit, primarily our Sanford-Brown locations. This was an area of huge growth for us a few years ago. However, many of our health programs were hit hard by the economic downturn and by changing employer demands, diminishing placement opportunity and placement rates. Further, students today are more weary of taking on debt, concerned about job prospects, and confused about wholesale changes in the medical field, and have been hesitant to commit to health education programs which has also hurt our health schools. Despite these challenges, we have the assets, we have the experience, we have substantial labs and facilities, teachers, technology, and employer relationships within many of our health institutions, and they represent a foundation we believe we can rebuild upon to better serve our students. We expect the turnaround in our career schools to take some time. I guess we're putting everybody on notice of that, although we expect a relatively faster rebound at Le Cordon Bleu.

I'm going to close by reiterating a belief I have shared before. Private post secondary institutions are essential to closing the higher education skills gap in America. The private sector has the capital, even as budget pressures impact public sector education. The private sector is more technologically savvy. It is more creative and innovative. It savors competition.

The bottom line is that we're needed to help educate and train students to meet unfilled job opportunities, some estimate as many as 3.75 million in the current environment, and the skills gap that will continue well into the future. That's why I remain positive about this sector. The changes and the strategies that I have described should assure that we will continue to be one of the institutions students look to, joining the more than 500,000 graduates we have already served and our proud alumni and we believe are gainful employed contributing citizens. Thanks for your time listening to both our short and long-term plans.

I'm now going to turn it over to Colleen who is going to talk about the numbers of the past quarter and the past year, and add a few other insights in her talk. Then we'll take questions. Colleen? Now you're up at bat.

Thanks, Steve. Let me first start by saying that I'm happy to be speaking with you today. As the remarks made by Steve convey, we are at a critical point in the Company's history, and I look forward to working with the leadership team as we execute against our strategic vision.

Now let me provide some additional comments from the financial perspective. The third quarter continued to present challenges for the entire post secondary education sector with weak new student demand, lengthening student decision making processes, and further operating deleverage impacting operating results. Further, Career Ed's matrix operating structure presents additional operating complexity that has put additional pressure on our margins. Before speaking further on our strategic path forward, I'd like to recap the quarterly results.

During the third quarter, the Company generated revenue of $333 million, a decrease of 22% versus the third quarter of 2011. Operating loss was $48 million in the quarter, driven primarily by declining enrollments within our career schools group of campuses. Overall, student population was approximately 82,000 students, down 22% from the third quarter of 2011. And our new student starts for the third quarter of 2012 were down 23% versus last year. While we have now fully anniversaried the introduction of our student orientation and readiness program known as SOAR, let me remind you that the year over year start comparison is impacted by a timing shift that occurred in our culinary and health institutions. On a comparable basis, new student starts would have been down 30%. Also, pre-enrollment testing accounted for approximately 480 basis points of this decline.

Let me spend a few minutes on each of our operating business segments. First the university group which includes our predominantly online institutions, Colorado Technical University and American InterContinental University. For the first quarter, CTU revenue of $89 million was down 11% versus the third quarter of 2011. New student starts during the quarter were down 19% compared to last year, and student population ended 10% lower.

AIU revenue was $71 million, down 17%, reflecting impact of a 19% decrease in new student starts and a slight reduction in the average credit load per student. Despite this decline, we are pleased by the fact that both CTU and AIU continue to experience improvements in levels of students' persistence. Operating margins in CTU and AIU were 10.9% and 1.5% respectively. These results are down from prior year levels and reflect the impact of lower conversion rates and lower enrollments per admissions advisor. We are in the process of implementing improvements to the current business model, including modifications to the way we interact with perspective students, changes to enrollment processes, and enhancements to the educational experience for our students.

Turning to our international group. Revenue of $15 million was down 12% to prior year due to unfavorable exchange rates and the impact of higher than normal graduation levels that occurred during the first quarter of this year. Excluding the impact of foreign exchange, revenue would have been flat for the third quarter of 2011. New student starts for the quarter increased 7%. Operating loss for the quarter was $6 million, and it's primarily related to the institution's traditional academic calendar in which students take no classes during the summer months. Further, the school has also made several strategic investments in both programmatic accreditation and a new blended learning curriculum to be used at the International University of Monaco. We continue to be very pleased with the success of our European institutions, and view them as an important element of our future growth.

Our career focus schools have been the subject of much change in the past 12 to 18 months. In the third quarter, revenue of $185 million was down 30%, reflecting a 34% decline in new student starts and 34% lower student population levels versus the prior year. Operating losses during the quarter were $47 million due to in part by the businesses high fixed cost nature that has been especially impacted by the recent deleveraging. With the recent addition of Dan Hurdle as our Chief Career Education Officer, a considerable amount of effort has gone into the development of the strategic vision that Steve spoke to earlier, with a long-term view towards optimizing these institutions and establishing a comprehensive career college strategy.

Now let me take a minute to provide additional color related to the actions we are taking to position the Company for future growth. As Steve mentioned, we announced in the press release and the Form 10-Q that we have made the difficult decision to teach out 23 ground campuses. These campuses identified for teach out are expected to contribute approximately $124 million in revenue and $62 million in operating loss for the 12 months ending December 31, 2012. These 23 campuses were identified after careful analysis of a number of factors including operating performance, student outcomes, and strategic implications. We will be making specific campus closure announcements within the next 30 days. Consistent with our commitment to students, we will work with each of the locations to insure that existing students are afforded the ability to complete their course of study. We anticipate that the majority of these campus closures will be completed by the first quarter of 2014.

In addition to campus closures, we announced last night our intention to implement a restructuring plan which will align the operating structure across our campuses, as well as reduce costs within our campus support center to more closely align with current enrollment levels and to standardize operating structures across our institutions. As a result of the restructuring, we will eliminate approximately 900 positions this year. Please keep in mind this includes both affecting current employees as well as closing unfilled positions. These reductions will result in a fourth quarter severance charge of approximately $7 million and are estimated to achieve between $45 million and $55 million in annual operating expense savings.

Before I open the call for questions, let me update you on our financial position, liquidity, and expectations surrounding the Department of Education financial responsibility ratio. As of September 30, 2012, the Company had cash, cash equivalents, and short-term investments of $373 million. Our cash flow from operations for the three months ended September 30, 2012 was approximately $33 million with capital expenditures in the quarter of $10 million or 2.9% of revenue. Included in this quarter's cash flow from operations is the impact of the delayed drawing down of approximately $20 million in Title IV funds and a $15 million tax refund receipt related to fiscal 2011.

As we execute on our strategic imperatives, we expect there will be continued pressure on our domestic operating cash flow in the short-term. However, we anticipate that we will be able to satisfy the cash requirements associated with, amongst other things, our working capital needs, capital expenditures, and lease commitments through at least the next 12 months, primarily with cash generated by operations and existing cash balances. Additionally, our US credit agreement expired on October 31, 2012. Keep in mind, during the life of the facility, no borrowings were requested other than for the support of letters of credit. Discussions surrounding the level and terms of a replacement credit facility are ongoing. Effective October 31, 2012, we have provided cash that will be restricted in use to provide securitization for the letters of credit previously covered under our US credit agreement.

As you are aware, to participate in Title IV programs, our schools must either satisfy standards of financial responsibility prescribed by the Department of Education or could be subjected to additional oversight, required to post a letter of credit in favor of ed, or placed on provisional certification. Our composite score for the consolidated entity for the year ended December 31, 2011 was 2.3. Recent profitability declines have placed downward pressure on our financial responsibility composite scores. Our current projections show that on a consolidated basis, our composite score is expected to be in the zone of financial responsibility for our fiscal year ending December 31, 2012.

Finally, as matter of policy, we do not provide guidance. However, we do anticipate that the recent market trends impacting our domestic institutions will continue into the fourth quarter. We have also discussed there continues to be a great deal of change in our career schools. Previously, we projected approximately $100 million to $120 million in operating losses for the career schools as a group. Based on the trajectory coming out of the third quarter, we now estimate that combined operating losses for career schools will be between $140 million and $160 million in 2012. This excludes the impact of impairment, legal settlements, or any other one-time items.

And so with that, operator, let's open up the call for questions.

(Operator Instructions)

Gary Bisbee, Barclays.

Can you give us any color or commentary to help us think about what the magnitude of the costs related to the teach ups are? I don't so much care about goodwill or intangible writedowns or that kind of thing, but the value of the excess lease commitments once you close them, how much they could lose in the period between today and getting them closed and any commentary to help with that? Thanks.

Thanks, Gary. This is Colleen. At this point, as we disclosed in my remarks, we expect the losses for those campuses that are going to move into teach out for 2012 to be roughly $62 million. And comprised in those campuses are, to your point, remaining lease obligations.

As we work through and continue to look at opportunities to exit those locations, we anticipate that we will do our best to limit the costs related to that. So at this point we are not going to provide specific information regarding our expected costs. We do anticipate, as we move into the fourth quarter, similar to what we've done historically, we will set these campuses into their own reporting segment. And as such, we'll be fully disclosing the operating results and related costs to the teach outs at that time.

If I go back and look at the 14 or 15 schools that the Company taught out between 2007 and 2009, the operating losses from the period of beginning that process were twice what the operating losses were in the year prior, so the year that the decision was made. And the costs to exit real estate and other cash charges were more than the amount of operating losses.

Are there -- it would appear to me that your entire US cash balance could be used up and maybe more in doing so if the costs were similar. So, I appreciate that you don't want to say much, but can you say anything to help us understand if that fairly recent experience that this Company has had is a good rule of thumb to use? Should we be thinking about an inability potentially to handle those costs or are there reasons to believe it could be much less than that prior experience? Thanks a lot.

This is Steve. Our calculus -- we've seen your numbers, and our calculus regarding the closure, the teach outs of these schools is somewhat different than your calculus regarding these schools. Obviously, there are costs.

We have already stated to you what the expected contribution of those schools are for the period of 2012. And as you know, at teach out there are certain costs that you can take out immediately and others are reduced as the teach out progresses. So yes, we have looked at it. Our calculus is somewhat different than yours. And as Colleen has already stated, we fully expect to have sufficient cash for the next 12-month period.

And then if just if I could sneak one last one in, is the operating loss similar to what you've seen on a cash flow basis from these? So said differently, the schools that you're planning to continue, is it fair to say that those today are generating a healthy amount of cash if you look at them excluding the drag from these weaker performing schools? Thank you.

I'm not going to comment on that. Let's go on to the next questioner.

Jerry Herman, Stifel Nicolaus.

It's Jason Anderson in for Jerry. Regarding your commentary on the financial responsibility, and also thinking about the issue Corinthian is having with their treatment of intangibles and their composite score, could you elaborate on how you're treating that? And your projection of being compliant?

Thanks, Jason. This is Colleen. I'll take that question. We have looked at the disclosure. I don't want to speak to the specifics related to what Corinthian is working through with the Department. I can speak from our perspective and the calculations that we've done in our financial responsibility over the past years has been from our perspective on a consistent basis. As you know, we have taken impairment charges over the course of the past number of years and have treated those as normal operating expenses for purposes of the calculation, but I don't want to speculate on the outcome of Corinthian discussions with the Department.

Okay, thank you. And this one here, a little bit more of a strategic question, obviously you have a lot of things going on that you're addressing. But you mentioned last quarter retracting the efforts to go to one OPID presumably so you can open up programs. Do you have any -- can you comment on any of your new program expectations into '13?

If the question is, do we have plans for other types of consolidations of OPIDs or if any of our plans are dependent on that, they are not. Did I understand your question correctly?

I was just wondering, presumably you were doing that so you could roll out new programs to students, and I'm just wondering what your thoughts are on that into '13? Are you going to be able to expand, open up new program offerings to students? I'm just thinking in the growth. Can you work on the growth side while you're dealing with the restructuring side?

Jason, this is Colleen, and you are correct. Our previous commentary, as we made the decision to remove the request for the consolidation, was most importantly around the inability during that time that it's with the department to roll out new programs. The Company had built up, so we did not stop developing new programs while we were going through or waiting for the approval on the consolidation.

What we did do once we removed our application was very thoughtfully looked at those programs that we had been working on to determine and prioritize which ones we wanted to move forward quickly with the Department on. And we have successfully submitted program applications and have had approvals of subsequent to removing the consolidation request.

So as we move into '13, yes, it is something that we're looking at and we'll continue to focus on. I think Steve's remarks also covered as if the aspect from a strategic perspective of moving quickly into those programs that offer the best outcomes for our students. So we are looking at that as we move into '13 under the auspice of insuring that we are putting programs in place again that provide good outcomes -- the best outcomes for our students.

Great, thanks. And one follow-up to that. Is there any way you can give us some color on impact of that? Like how many new programs in '13 would be slated versus what we've seen? Presumably maybe none here in '12?

This is Steve. As I mentioned in my prepared remarks and as Colleen just alluded to, since rescinding the application for the OPID consolidation, we have been doing this and we are now on a continuous basis in the process, not only with the Department of Education, but also with our accreditors, seeking alterations for programs and approval for new programs. And this will be a continuous process.

I cannot give you a specific number of how many programs we're going to ask to be adapted or modified and how many programs we're going to ask for it to be new, but I have tried to imply in the remarks I made that we are going to be in the processes of adjusting what our historical program offerings have been to what we see as meeting employment needs in the communities in which we operate. Can I put a number of those? No, I can't. I can only tell you it's going to be a continuous process and that we are looking to partner with both our accreditors and the Department of Education in enabling us to adapt as quickly as we can.

Corey Greendale, First Analysis.

Couple questions. On the cost savings front, I was hoping you might be able to give us some sense of how much of the $45 million to $55 million in cost savings might overlap with the campuses you're closing? So in other words, whether that would be incremental savings or whether that could be part of the savings in just teaching out those campuses?

Corey, thanks for your question. The reductions in force that we're going through are across all of our institutions. Will they impact those campuses that have been identified for teach out? Yes, but they are, I will say, over and above the actions that we've decided to take from a teach out closure perspective.

Okay. And then a question on the AIU/CTU strategic plan. So I think Steve, in your commentary you mentioned people finishing their degrees quickly and efficiently. The commentary in the Q talks about price -- competitors are being competitive in terms of pricing. So I was just hoping you could say a little bit more about what you're thinking in terms of the differential tuition in CTU and AIU and how it compares to the current price levels?

I can't quantify for you. It's a reasonable question and a good question, but I can't quantify it for you right now. Obviously, one is going to be a higher support system and the others going to be less of a support system, and that should reflect itself in the necessary infrastructure to support the students.

And that should in turn reflect itself in pricing. We obviously have done some work to date in terms of just what the pricing adjustment should be and what the differential should be, and we continue to work on that. We expect to be able to give you probably some more color on that in the early part of next year.

Okay. And then one regulatory question. You mentioned in your script about the placement rate, the things you've done to fix that. The Q goes through a number of metrics in terms of recent data that you reported to the ACICS and ABHES. Can you just give us a little bit of what the implications might be, whether that triggers any sort of review or anything like that?

Those two are in a little different state, but I think you know that ACICS has adjusted its categories in the past year. They used to have just the one line that you either passed or if you didn't pass there were various actions that ACICS could possibly take with respect to being under the line which used to be I think 65%. Now they have a variety of categories and that has been instituted in the past year.

It is largely at the discretion -- since it's also new it is largely at the discretion of, in ACICS's case, to determine what to do at each level of placement rates. And I am sure that they will be responding to us and to all of the schools in the near future, now that we have all submitted our rates so to speak, as to what to do at each level of rate performance.

Clearly, those schools that are at the bottom or below what they consider to be the lowest acceptable rate, which I believe is 47% now, we will wait to see what actions ACICS takes at its discretion. It could range to, again, certain restrictions on program approvals. It could range to a number of actions that it thinks it should take.

I have tried to say to you today and we have said to everyone that the numbers that we submitted to ACICS, ABHES, and ACCSC all are a reflection of that year period ending June 30, 2012 where we did much, much better in the second half of that period than we did in the first half of that period. And I think we have demonstrated to everybody a great deal of improvement. Hopefully, that will also influence the actions that each of the accreditors decides at its own discretion and under its own authority to take.

Brandon Dobell, William Blair.

I was hoping to get maybe a little color in the career schools business about the pricing strategies? Are you looking to have program by program pricing, location-based pricing, just a little better sense of how you're approaching that and what we should think about from a revenue per student trend looking out a couple, three years? Thanks.

The answer to the first part of your question is yes. You obviously have been thinking along the same lines that we have. We're not, I think it's fair to say and Colleen may jump in and comment after I do, but we're not going to have unilateral pricing activity.

I know that some others have stated that in various calls, but we're going to do it exactly as you suggested. We're going to do it geography by geography. We're going to do it demand by demand. And we're going to react to the marketplace. Simply said, where we have programs that are in oversubscribed and in great demand and great needs, we will price accordingly. And the opposite will be true, as well.

We believe that we are remaining in locations where in the longer term there is going to be demand for programs that we offer, that is employer demands as well as student demands. So, we are going to do a market by market, program by program pricing strategy which we presume could go in both directions.

Okay. And then sticking with schools for second. As we think about the schools that will keep going in operation, I would presume from a 90-10 and from a placement rate point of view that the ones that will keep going would have been at the top of the list? Or are there ones that you felt that the changes you've made set them up much better going forward so there's underperforming schools on a historical basis that you think you can turn around effectively? I'm just trying to get a feel for what you're looking out, let's call it 18, 24 months? That's when those metrics like 90-10 or placement rates or things like that will start to look from the remaining group of schools.

Good question. I threw into my prepared statement that we had I think almost 50 criteria against which we measured each of the schools in evaluating which ones to close right now and which ones to try to build on in the future. And obviously, the two metrics or the two criteria that you just mentioned were amongst those criteria and a lot of others that we think are important, as well.

I'm not sure I can answer that question in a positive. I know I can answer it in the negative, which is that those schools that we did not think were a good bet to either pass 90-10 or would be struggling for 90-10 or we'd have to manipulate OPIDs or something for 90-10, those we eliminated, and the same is true on placement rates.

Okay, and then final one for me. Between AIU and CTU, it sounds like it's going to be different price points based on service levels and infrastructure and things like that. How different should we expect the programmatic focus to be? Should the course catalog look very different or it's going to be similar programs just with different levels of interaction with the institution from the student perspective?

I should probably have had Jason Friesen in the room to answer that question directly. I actually, based upon what I've heard -- I'm not sure, again, Colleen may be closer, but based upon what I heard, there will be program differences between the two, at least an emphasis, at least in core programs where they believe that they have embedded expertise, faculty, and student experience, things that they really, really know. And I think they do expect there to be differences.

I think there's probably more of a technology bent on the Colorado Tech side. There's certainly a security bent. We expect that we're very, very strong for example, in all sorts of security, academic disciplines, including homeland security. We expect to build on that. So, I think the answer is yes, there's going to be differences in program offerings, as well as in the level of complete service support and infrastructure that's offered.

Jeff Silber, BMO Capital Markets.

Just wanted to go back to the campus closures a bit. Colleen, you were kind enough to give us some detail regarding revenue and operating losses. Can you tell us what the impact on enrollments will be?

At this point, Jeff, I'm not able to share that information with you because we said in our prepared remarks, we have not yet notified the individual campuses. So, I'd like to hold that until we have that communication made.

Okay, I understand the sensitivity around that. In terms of the workforce reduction, and again this may be a sensitive question, can you roughly give us an estimate of how much of that is going impact corporate overhead versus the specific segments?

Again, I apologize for what may seem to be non-responsive, but what we are not intending to share the breakdown. What I will say though is, similar to the criteria that we went through from the teach out perspective, we took a very hard look at what the structure of the corporate center should be as it pertains to supporting the campuses from a fact that they have begun and have been declining over the past number of quarters. So there has been a very focused look, not only at the campus structure as we alluded to in our remarks, but also at the corporate center.

I want to punctuate that. Colleen is being modest because this is her first call. She's done a very good job of doing a deep dive into and analyzing our corporate cost structure and determining how it should be adapted as we adjust to this downsizing in the field and at the campus level. And there is going to be at least a commensurate reduction at the corporate level to adjust to the field. And she's done an excellent job at analyzing that.

I understand.

Just wanted to give her a little kudo.

That's great. I think also you mentioned in your prepared remarks that you had some cash put in restricted cash as of October 31. Can you tell us roughly what that amount was?

Yes, it was just under $8 million.

All right, great.

And that would be, again, just to clarify, that was in October upon the termination of the facility.

And do you know what in terms of -- I guess it's replacing the size of the letter of credit, roughly how much in letter of credits have you been posting prior to this?

It's roughly about the same amount.

Okay, good. I just wanted to clarify that, that's great. And are there any other one-time items in the quarter whether calendar quirks or one-time issues both in 3Q or 4Q that we need to be aware of?

No, I did mention, Jeff, in my remarks the shift in starts for health and culinary. If you'll recall, last quarter we mentioned it, as well. There was an additional start here in the third quarter for both of those education groups.

And roughly what was the impact of that?

I think it moved us about 10%.

All right, great. And then finally, Steve, in your prepared remarks I think you said that all senior management slots are filled. Does that infer that there will not be a CEO search coming?

No, that did not imply that.

All right, good.

It just said that willingly or unwillingly, I'm still here. I'm still enthusiastic and committed, but we do have a search underway actively to replace me.

Trace Urdan, Wells Fargo.

With respect to the changes that you're contemplating at CTU and AIU, I'm wondering if you have begun the dialogue with HLC about the prospective mission changes there?

We have been in dialogue with HLC on any number of issues, and we know that at least some of the changes that we're talking about requires their approval. I don't think that we have brought specific changes yet to their attention because we are still, as I mentioned just a moment ago, studying a variety of aspects to this. But it is -- I think we said repeatedly over the past couple of calls and in conversations and one on ones with all of our accreditors that it is our intention to partner with them on all of the changes that we make.

Okay. And then I believe in your prepared remarks you referred to multiple announcements regarding how the campus closures were going to take place and which segments and which schools. Can you give us a little bit more detail on when investors can expect to receive that information or are we going to be watching a series of 8-Ks? Is it going to happen all between now and January or are we going to get it all at once? How is that going to work?

Trace, this is Colleen. What we've committed to as a leadership team, and Steve spoke to it in his prepared remarks to your point, we have a process that we go through to insure that we have appropriately notified all constituencies including the Department, accreditors, the states in which these campuses operate, and let's not forget the students that will be impacted, as well as our employees. So having said that, our anticipation is that we would be notifying those campuses that will be impacted here early into December.

Having said that, as far as a public disclosure around that, we do anticipate moving quickly because we appreciate the anticipatory stress or what have you that this may cause on all of our constituents. So, we are moving as swiftly as we can be. We will update appropriately as we execute through that. I would not anticipate a series of communications. We will make the appropriate disclosures as we deem necessary as we feel there's material information to share.

Okay. It seems in advance you ought to be able anticipate what might or might not be material. So I guess my question again is would we expect to receive some communication from you prior to the next earnings announcement or would we expect not to really get much detail from you until that point?

It will become apparent on websites what schools we are closing. We are giving the overall numbers that are material now, that we know of now. And as other material requirements or financial disclosure requirements become necessary in the future, we will issue them, but it's going to become I think pretty readily apparent over the next couple of weeks and months which schools are closing and so forth.

David Chu, Merill Lynch.

How long has CECO been on Heightened Cash Monitoring, I guess it's the 1 status?

One year.

And was this caused by the placement rate issue?

To the best of our knowledge, yes.

And you guys talk about in the Q potentially getting put on Monitoring 2 status. Just wanted to see if you can explain what the differences are and the likelihood that that could happen?

I can't speak to the likelihood of it happening. We expect to be in the zone. I'm not aware, I don't know if anyone is aware of anyone who has been in the zone ever being put on HCM2. So you can draw whatever conclusion you want from that.

It would be completely unprecedented if it were to occur, so that's number one. I can only respond in that way. The difference between HCM and HCM2 is -- you want to explain it? Go ahead. Either one of us can explain it to you. Colleen will do it.

So HCM1, I think as we've disclosed previously -- and to Steve's point, we've been on that for now just over a year or so -- really did not have a significant impact on our operating processes. So, as we move through the requirements of that, we made some tweaks but nothing significant from what was, even before being on HCM1, our internal processes. As we move, if in fact to Steve's point there is an action that moves to HCM2, it greatly delays the timing of when we -- our institutions that are placed on that would be able to draw Title IV funds and move more to something between 30 to 60 days of a delay from where we are today.

Okay. And in the Q, it also states that you guys will be meeting that Foundation for Education Success, like the free trial period. I think it's 21 days. How does that impact the SOAR program going forward?

It replaces the SOAR program. The SOAR program, as you know, only affected certain students. This will affect all new students, and we think it will be equally, if not more effective for students.

So the difference is, a, it's all students versus a certain select amount of students? And it seems like -- is the program shorter? I think SOAR was five weeks. This one is like three weeks. Is that correct?

Yes, it was five weeks, but it was not necessarily five weeks of classes depending upon how it was applied in various places throughout the Company. As you know, as I said enumerable times, this is a pretty complex place, so it wasn't applied uniformly. But yes, it was in concept five weeks everywhere, but not necessarily five weeks of actual classes.

Jeff Mueller, Baird.

Steve, at the beginning of the call you talked about the need for people in the industry to evolve or transform themselves or face perpetual decline, which seems to suggest that you think there's secular challenges facing the industry, it's not just transitory challenges. But you also talked about returning to, I think you used the phrase sustainable growth.

Just wanted to know how you're thinking about CECO returning to sustainable growth? In your view, is that completely under your control due to all of the initiatives that you're rolling out or would that require some improvement in the overall environment?

Wow, that's a wonderful, wonderful question. I'm not sure, however, that Matt is going to allow us to expand the amount of time we have on this call to give an adequate response to a very deserving question. I would say this. We'd all like to think we're driving our own bus and we are the determinants of our own destiny, but in today's highly regulated world, there are a lot of forces outside your own bus that determine whether there are barriers, potholes, turns in the road, and so forth. So, I think it's a combination of things.

I really do believe that there is a great need for innovation in education in our society. And I have an embedded belief that there's a great need for more application of technology to education to fill the education gap that exists in our country. And that fundamental belief says that our sector and our schools are needed. And I also have a belief that there will be those institutions, hopefully including ours, that will have the intelligence, the strategy, the commitment, the resources to operate in such a way that we can provide the educational courses and programs of study and certificates and certifications that are necessary to place people in these jobs.

And if we are able to do that, if we are able to put as much emphasis on the back end of the business as has been on the front end of the business traditionally for the last decade or two, that we are going to be a successful organization. And I don't think that anybody is going to begrudge an organization that can provide that kind of service, an appropriate and adequate and reasonable, even attractive return.

Okay. And then just a quick follow-up on who that bus driver is going to be. I was under the understanding that you guys had suspended your CEO search for a permanent CEO indefinitely earlier in the year given the challenges that you've been working through. Was that the case or when did you reinitiate the search? I don't know if there's any rough timeline you can provide, Steve?

I think what I said, when I first came, we didn't think it was going to be that long. And then we said we would not undertake a search until we got our arms around the problem. We do think that we have our arms around the problems now. We think we have everything identified.

And hopefully you'll agree that we have a course to act on, and that is now an appropriate time, given the fact that we have a strategic course to work on, given the fact that we have addressed some of the crises that the Company was facing back in November, December, January that we can attract a credible candidate to come in here and be the day-to-day leader of the Company. And within the past month or so, we have initiated an active search for a successor for me. And hopefully, we'll find somebody who has all of the characteristics that our employees can admire and that all of you can admire.

I'll now turn it over to you, Steve, for closing remarks.

I think we have just about used up -- we've gone over our time a little bit. So, I want to thank Matt for that. Thank you for your questions. I hope that we have answered them and given you the color that you expected to get on this call. Once again, I want to thank Colleen for participating in the call. I think she did a great job this morning.

And we look forward to talking to you all down the line. And if there's anything that any of you wanted to ask and didn't get around to asking, please feel free to call Matt. And if you need Colleen or I involved, I'm sure we'll make ourselves available to you. Thanks again for your time this morning. We appreciate your being on. Bye bye.

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