Perdoceo Education Corporation (PRDO) Q3 2011 Earnings Report, Transcript and Summary

Welcome to the Career Education Corp. third quarter conference call. My name is Dawn, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Mike Graham. Mr. Graham, you may begin.

Thanks, Dawn. I'd like to start by expressing our appreciation for joining today's call in relatively short notice. As always, we value your interest in Career Education Corp. The purpose of today's call is to provide you with information about the change in leadership at Career Education and a commentary on the company's third quarter performance. The Chairman of our Board of Directors and Chief Executive Officer, Steve Lesnik, will provide you details of the change. Before I turn the call over to Steve, let me remind you that yesterday's press releases, as well as our remarks made today, 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 about 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 on our quarterly filings, our quarterly earnings release, our annual report filed on Form 10-K for the year ended December 31, 2010, and other filings with the Securities and Exchange Commission. Except as expressly required by securities laws, we undertake no obligation to update those risk factors or publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. At the conclusion of Steve's remarks, I'll provide commentary on our third quarter performance and provide an update on key matters we have discussed in previous quarters earnings calls. Last night, we reported our third quarter operating results. We intend to file our Form 10-Q for the quarter ended September 30, 2011, with the Securities and Exchange Commission on or before November 9. As I will be discussing our results in today's call, we will no longer hold our call previously scheduled for November 10. We understand that this information is a lot to absorb in a short time and to cover in a 1-hour call. Since we have a limited amount of time for this call, we may not get to all your questions and recognize you may have follow-up items. As always, Jason Friesen and I will be able to answer your question and can be reached through our Investor Relations department. Now, let me turn the call over to Steve Lesnick.

Thanks, Mike, and good morning to all of you for the first time. I'm Steve Lesnik, Chairman of the Board and now also the company's President and Chief Executive Officer. The board has appointed me to these roles succeeding Gary McCullough, following his resignation. As CEO, I'll deal with the day-to-day management of Career Corporation -- Career Ed Corporation, as well as dealing with the development and implementation of strategic business initiatives to move career education forward in a rapidly changing competitive environment. It's an important time for CEC. And as CEO, it'll be my job to make sure that across the entire enterprise, we are focused on serving our 100,000 students through providing them with high-quality educational experiences that are useful to them. I'll be working closely with our board and experienced members of our senior management to make sure we keep our sights on that central focus of our mission. We have, throughout this enterprise, experienced highly dedicated management professionals and we have a solid foundation of educational institutions and brands. I'd like to thank Gary for his years of service to our company. Gary joined Career Education in March of 2007, and worked hard to professionalize and improve the management of the company at both the corporate and operating levels during a difficult period and he succeeded in doing that. The board and I are committed to ensuring that Career Education's future is dependent on our institution's ability to provide quality education and services to our students. This is absolutely critical to enable the company to achieve increased value over the long term for all our constituencies. Turning to the mandate that I have been given by the board. It is as follows: First, assure that our corporate governance, including our adherence to strict regulatory compliance, is strong at all times and in all places and is executed consistently and effectively. Second, assure that the company has a strong and well-defined strategy against which we could educate to create long-term value for all stakeholders. Third, supplement the fine core management team with new talent. Fourth, assure the company is advancing the learning and the lives of our 100,000-plus students. Over the last 2 years, Career Education has been both reactive and progressive in dealing head-on with significant changes in the regulatory environment. We have improved our IT infrastructure and built upon our acknowledged position as an industry leader in that regard. We have streamlined operations and built solid and leverageable shared service capability. We have also expanded our geographic footprint. I know management is very proud of all these achievements. At the same time, the board, in evaluating the progress of Career Education, believes that more tangible results in enhancing enterprise value need to be achieved. And to do so, requires different thinking and new leadership at the chief executive officer level. We are very aware that in order for the company to build its value, we must confront head-on a number of issues now before us. Some of these issues are industry-based, while others are company-specific. We're dedicated to a culture of student commitment, compliance and quality. As part of this, we will complete and resolve any issues arising from our internal investigation regarding our placement rates. We are obviously disappointed by the findings of our internal investigation conducted by independent counsel. It will detract from the work that has been put in by many members of our team. I believe our people are focused on doing the right things in the right way on behalf of their students. Unfortunately, the behavior discovered in this investigation doesn't align with that broader belief in a compliant culture. That will change. We are continuing to fully cooperate with the New York Attorney General's office with a view towards satisfying their inquiries just as promptly as possible. I am confident we can reinforce the governance foundation in place that the board mandates for Career Education. We need strong leadership to do that at the top of all of our operating groups and we'll fill open positions within those units. We are committed to achieving financial performance, consistent with the priority of growing the value of career education over the long-term. I'll serve as Chief Executive Officer, while a comprehensive national search is undertaken by the Board of Directors to identify a long-term CEO to lead our company. Because we are focused on identifying and hiring the best possible person for the job, we will deliberately undertake the search -- we will undertake the search in a deliberate manner with no immediate deadline. We have a goal that it will be concluded in 2012. With that said, we are mindful that time is of the essence. The board's objective is to put in place an executive who, based on his or her expertise and accomplishments, can take a fresh look at how Career operates as a corporation and how it should best operate in this new complex environment that characterizes our industry. That, in turn, should facilitate and [ph] build its value for the long-term. On a personal note, I'm pleased that Board Member Leslie Thornton, who has a respected background in education from the public service aside including a service at the U.S. Department of Education, has agreed to assume the newly created position of Lead Independent Director of the Board during my tenure as CEO. The board and I are confident about Career Education's long-term potential. At Career Ed, we define our success by our ability to provide students with quality education, which ultimately drives long-term growth, value and success for all of our stakeholders including, importantly, our stockholders. Now I'd like to turn the call back over to Mike, who will review our financial results for the quarter, and provide you with an update on other key items of note. Mike?

Thanks, Steve. The third quarter presented challenges for both CEC and the industry as other private-sector schools have recently disclosed weak new student demand, lengthening student decision-making processes and operating deleverage that had significant impacts on operating results. During the third quarter, our teams continue to execute the actions required to optimize our near-term business goals and objectives, while also implementing strategies and business models necessary to effectively compete and continue, as Steve said, to provide high-quality education for our students. Before I discuss a few of the actions we have taken and provide you an update on our placement rate review, let me recap the results for the third quarter. During the third quarter, our revenue decreased 18% versus the third quarter 2010. We earned operating income of $16 million. Operating income for this third quarter reflected the pricing of $11 million of charges related to various regulatory matters. First, approximately $2 million in outside legal fees associated with responding to the New York Attorney General's subpoena requests. Second, roughly $3 million in charges associated with conducting our internal placement rate review. And third, a reserve for $5 million related to potential return of veterans affair funds, which I'll speak to later. Our operating margin for the quarter was 3.7%, a 380 basis point decrease from the third quarter last year. The $11 million I just noted decreased operating margin by 260 basis points and reduced reported earnings per share by $0.10 per share. Student population was approximately 104,000 students, down 12% from the third quarter of 2010, and our new student starts for the third quarter of 2011 were down 22% versus last year. And remember, this includes a negative impact of our Student Orientation and Readiness program, known as SOAR, in AIU and CTU and as well as other entrance requirements that we placed in other operating units. Again, 2011 has been a challenging year for our sector and has certainly been a challenging year for CEC. Let me give you updates on the responses as we met these challenges head on. During the year, we gained clarity on the program integrity rules, including gainful employments and as a result, we have rolled out a new Culinary model. We have negotiated and established new contracts and new ways of working with our lead aggregator partners. We've rolled out new entrance requirements for certain of our programs, including implementing SOAR and expanding pre-enrollment testing within Culinary and Art & Design. We are also rolling out additional changes to our Art & Design SBU that we believe will improve the competitive positioning of the business, as well as position certain of our programs to achieve compliance with the gainful employment rules. First, we critically assess each of the programs in Art & Design and their respective curriculum. As a result of the review, we've optimized the program content, the degree type, and the program duration with the anticipated first job in mind to more effectively prepare students for the skills in-line with marketplace demand. Second, we work to do our best with our attrition levels with thread the needle, complying with both the 90-10 Rules, as well as gainful employment. Third, we will implement a full-time traditional term structure as a result of student's gain on their degree in 4 academic years instead of 5. And finally, we'll continue our efforts now and into the future by aligning our marketing messaging, marketing campaigns, and leads sourcing with new student demand. On the New York Attorney General investigation last quarter, we reported that in May, we had received the subpoena from the New York Attorney General's office. A number of other private-sector post-secondary education companies received similar subpoenas. As we reported in our press release yesterday, the investigation is ongoing. We continue to cooperate fully with the New York AG with a view towards satisfying their inquiries as promptly as possible. Regarding the internal investigation for the determination of student placement rates. In August we also discussed that we identified improper practices at certain of our Health Education segment schools related to their determination of placement rates. As a result of this discovery, the Board of Directors, in keeping with a solid corporate governance processes we have in place, and as Steve spoke of earlier, directed law firm coordinating our New York AG response to undertake an independent investigation of our placement reporting practices. As we previously reported, the Dewey investigation was initially focused at the campus level of our 6 Health Education ground schools located in New York, which were among the schools covered by the New York AG subpoena. As we previously reported to you, our board also directed Dewey to look beyond the specific issues uncovered at New York, in the New York-based Health Education schools and take a comprehensive look at the current placement rate determination practices of all domestic campuses to make sure they are appropriate. A major objective in undertaking this type of review was to make sure we are confident in the data our schools report to our creditors and our students for the current reporting period. This work is ongoing. We can report to you that Dewey has completed -- substantially completed its investigation of the placement practices at our New York-based Health Education schools and also completed its broader review of the placement determination practices of all our Health Education and Art & Design schools. As to the findings of the improper placement rates determination practices at the Health Education school, Dewey was able to confirm through its investigation that such inaccuracies and practices occurred. We're obviously very disappointed by these findings but we took swift and effective action in identifying the conduct and rooting out the problem. And we've been fully transparent with the New York AG and other regulators about what we found at these schools. Again, as noted in yesterday's press release, the company has completed its broader review of Health Education and Art & Design segment schools placement rate determinations and those schools have recently reported their 2010 and 2011 placement rates to ACICS, taking into account the results of the review. We reported yesterday that a number of schools fall below the traditional 65% hurdle set by ACICS. From an overall SBU-average level, both Health and Art & Design were not materially below 65%. At the direction of our Board of Directors, we have already taken a number of steps with respect to our school's determination and reporting of placement rates. Before it is completed, our work in this area will extend from the classroom to the career services department at each school, among the steps we've already taken as part of this effort. Regarding employees, we have taken appropriate action with respect to all employees engaged in misconduct regardless of their position in the organization. In regards to policies, we have adopted new career service policies to provide further direction and clarification surrounding the criteria for including students as being employed in their field of study or in a related field of study. From a training standpoint, we've instituted additional training to ensure that all our career services personnel fully understand our career services policies. All of the career services employees in our Health Education and Art & Design segment schools have been trained on these new policies and procedures. We are planning to significantly increase the number of career services personnel dedicated to assisting students in finding employment after graduation. In addition, we've made a number of personnel changes in the career services area and anticipate additional restructuring of our career services operations. We've also implemented changes to the staffing of compliant personnel with oversight responsibilities for our placement rate reporting. And finally, we are planning to cap enrollments or to teach out certain programs where employment opportunities may not be as readily available as other programs at our institutions. All of these is being done to ensure that our students and our graduates have ample support as they pursue job opportunities, recognizing the current challenging economic environment under which our students are entering the job market. We are focused on placements for our students at each of the Health and Art & Design schools for the current reporting year which ends next June 30. At each school, as I said, we're undergoing a thorough review of capping enrollments on certain programs, teaching out certain programs, increasing the career staffing level, all with the goal of bringing each institution above the 65% level. Our experience with the creditors is that they want to clearer steps each institution's taking to bring placements above the 65% level. And our intent to sit down with them and show them our actions and what we are doing this year to achieve that. Steve Lesnik spoke [ph] to sign open leadership positions within our operating units and this includes turnovers in our senior management team. Steve manager's decided to leave the company recently for personal reasons. Brian Williams, our Culinary leader has returned to his residence [ph] on the West Coast, purchasing a restaurant and following his dream of going back to the kitchen. Tom Budlong has been our Chief Administrative Officer and Head of our International segment, has left the company due to a recent health concern. In addition, Tom McNamara, our Art & Design leader, left the company to pursue another professional opportunity. The International business unit is now under my leadership, while the Culinary and Art & Design teams report directly to Steve. Our efforts identified the right leaders for Culinary, Art & Design and Health businesses are well underway with Steve fully engaged in the recruitment process. Let me turn briefly to the operating results of the segment. Again, overall during the quarter, as is the case throughout the industry, we experienced further softening in new student interest in terms of student leads [ph] and at the rate in which students enrolled in our institutions. We view the overall market softness as a result of the number of factors including a weak economic environment, new program integrity rules, negative publicity in the segment, and the increased competition from prospective students. By business, revenue for AIU was $86 million, down 24% from the third quarter 2010 and new student starts for the quarter were down 32% from a year ago. As we discussed last quarter, new student starts were impacted during the third quarter by the implementation of the SOAR program. During the third quarter, approximately 1/3 of new student undergraduate starts participated in the SOAR, and approximately 60% of AIU students participating at SOAR program received a passing grade. This now represents the results from 3 cohorts of students. Had we not implement SOAR for the third quarter, the new student starts would have been approximately 1,100 basis points higher than reported, or negative 21%. AIU also continue to reduce advertising spending levels and focus efforts on the most promising and qualified new student leads from its historically best sources. For the past 6 months, advertising spend for 2011 was 18% lower than the comparable period in 2010. AIU's decision to reduce advertising spending was partially responsible for the institution's year-over-year decrease in the new student starts. As a result of lower spending and the overall market environment, new student interest in the form of leads, were down approximately 30% versus last year, where the new student interest to enrollment converted relatively stable when to the second quarter of 2011. Operating profit for AIU in the quarter was $12 million, and operating margin was 14.5% down 610 basis points from the previous year. Margin was impacted by a revenue per student decline for the quarter, partially driven by lower average credit hours as a result of the increased flexibility of the credit-hour structure we implemented last year. As we previously shared, HLC completed its advisory visit of AIU in January 2010, and that review was concluded with no sanction or limitations placed on AIU's accreditation status at HLC. HLC conducted a follow-up focused visit between September 19 and September 21 of 2011 to evaluate AIU's transition to the new undergraduate credit structure [ph]. AIU has received the HLC evaluation team's final report, which recommends that no further HLC follow-up is needed in the matter. We're very pleased with the school's work in this area and the team's report. Of course as you know, the HLC is not required to accept the recommendation of the team's report and put order additional monitoring other actions against AIU with respect to the matters. Turning to CTU. CTU Revenue declined 14% during the third quarter to $100 million. New student starts in the quarter were down 29%. As a result of market softness, we reduced advertising spending by 5% in the current quarter versus 2010. New student starts for CTU were also impacted by the implementation of SOAR. Similar to AIU, approximately 1/3 of new student undergraduate starts did not have previous college experience and therefore participated in the SOAR orientation class. Based on 2 cohorts of students of CTU, approximately 67% of the students who took orientation class received a passing grade. If SOAR have not been implemented, CTU's new student start for the third quarter would've been approximately 600 basis points higher than reported, or negative 22%. CTU's operating profit was $17 million in the third quarter and operating margin of 16.7%. As I mentioned earlier, CTU's results for the third quarter included a charge for $5 million. In August of, 2011, the U.S. Department of Veteran Affairs conducted a compliance survey at the Colorado Springs Campus of CTU and preliminary identified certain current and past students for whom it believed CTU had incorrectly certified the monthly housing allowance provided pursuant to the Veterans Educational Assistance Act. While we disagree with the Department of Veterans Affair's interpretation, and we continue to seek an appropriate resolution to this issue. We do not believe the students are best served as the department seeks to return a fund directly from these students. We chose the provider reserve in the event that CTU needs to step in, to ensure students are not harmed or held financial responsible in any way for this obligation. Turning to Culinary Arts. Revenue decreased 32% to $74 million on a 26% decrease in new student starts and a 6% decrease on student population. Recall the non-comparable calendar shift that we discussed last quarter that resulted an additional start in Q2 of 2011. Looking over the second and third quarter's combined for 2011 to normalize this impact, Culinary new student starts were down 13%. In addition, we've also rolled out new entry standards for Culinary programs. This also impacted new student starts within the quarter. Approximately 420 potential students did not achieve our minimum standard. Had all students passed, our reported third-quarter new student start would have improved by approximately 240 basis points to a negative 10%. Conversion rate trends over the past month have improved and are higher than those experienced for the comparable period last year. Culinary arts generated operating margin of 5.2% for the quarter, with bad debt expense for the segment as a percentage of revenue is 6.8% in the quarter, tracking lower than the high single-digits range we've provided earlier this year. Revenue for Health Education was $102 million in the quarter, down 7% from the third quarter of 2010. Health student population decreased 10% versus the third quarter last year, while new student starts decreased 18%. Excluding Health startups, student population was also down 10%. For the third quarter 2011, operating income was a loss of $4 million including $3 million of losses from the startup campuses. Last year those startup campuses reported approximately breakeven results. For Art & Design, revenue was $50 million, down 19% from the third quarter of 2010. Art & Design's new student starts during the quarter were down 40% compared to last year and student population ended 18% lower. During the quarter, Art & Design also implemented entrance testing for certain of its programs. New students starts in the quarter would have been approximately 400 basis points higher than reported had we not implemented our new entrance requirements. Operating margins were 5.1% for the quarter, 990 basis points lower than last year. Longer term, as we implement the changes I discussed earlier within the Art & Design business, it's our goal to improve the operating results for the SBU to levels that would generate returns in excess of the company's cost to capital. And finally, revenue for our International segment increased 30% in the third quarter, reflecting a 15% on new student population. Again, remember those schools on summer months are closed and we have an operating loss for the quarter. Let me now comment on our financial position. As of September 30, 2011, we have cash, cash equivalents and short-term investments of $449 million. Cash flow from operations was approximately $200 million. Cash expenditures in the 9 months of the year were $68 million or 4.6% of revenue. In the third quarter, the company repurchased 300,000 shares of our common stock for approximately $7 million. With the ongoing review by outside counsel, regarding placement rates and the onset of our response to New York Attorney General investigation, the company's determined it would not repurchase shares until subsequent public update on the matter was provided. Based on the progression of the progress of the placement rate review to date, including the steps I discussed earlier, we do not anticipate these same limitations in the fourth quarter. As of September 30, 2011, the company had remaining 0 repurchase authorization of $153 million. Finally, as we look forward, we anticipate and appreciate that there's a lot of interest in our view of 2012, and longer-term visibility regarding growth trends remained very difficult. We anticipate recent market trends will continue in our fourth quarter. These trends, including the softness in new student interest and enrollment conversion, have an experience in most of our domestic institutions and we believe again are primarily to the economic environment, the new regulations and the negative sector publicity. Let me turn the call back to Steve.

Thanks, Mike, for that update. I'd like to conclude by affirming that the Board of Directors and my management colleagues at Career Education are fully focused on continuing to position the organization, to build potential for the longer term. Each of us believes that education is one of the most vital sectors of our society and central to this country's economy. Its education that fuels broader opportunity and fuller employment. We're confident that private sector education, despite all of the recent turmoil, has an important and growing role to play, not only in America but in a number of other countries, and that Career Education can be among the best and brightest performers. Having just come through a period of heightened government scrutiny and regulatory upheaval, private-sector education is, I believe, at an inflection point in moving into a new educational climate. I believe this environment will offer enhanced opportunities for students and educators and will undoubtedly serve as a significant driver of economic growth and economic return for us. I know that I speak on behalf of our entire board in saying that we expect our company to lead the way using improved teaching techniques, research and technology to be increasingly effective in achieving concrete and useful learning outcomes. Career Education recently became a founding member of the coalition for educational success and I wanted to take a moment to speak about that. We adopted the coalition's new standards of responsible conduct and transparency. We will continue to be a strong advocate for the very high standards of conduct and accountability and support government policies that enable wider access to higher education, particularly for nontraditional students. And with that, let me open up the line for a limited number of questions until 8:30.

[Operator Instructions] Our first question comes from Gary Bisbee from Barclays Capital.

I guess, the question, one for each of you. Steve, you mentioned that one of your goals will be to ensure that the company has strong and well-defined strategy and I think you insinuated that maybe new leadership, new thinking at the top would be necessary to achieve that. From your time on the board, can you give us some impressions of where there were shortcomings in the strategy or you know what you think needs to be done?

I don't think I wanted to go into specifics on the contours of the strategy right at the moment. Suffice it to say, that a strategic review has been underway now for some time within the company and we hope to bring that review to a conclusion as quickly as possible and adopt a very definitive strategic plan that will enable everybody in the company to rally around it.

Okay. And then, Mike, I guess just on the expected spending around all of this, that the margins took a big step backwards. I guess not unexpected given the recent start trends, but did you -- how should we think about potential for cost saving in the short term versus investments to accomplish the strategic review and all the other things that are going on with the business?

Sure. Again, first and foremost, everything is centered around the student and taking care of all the issues that we have, as Steve said. So we look at those costs as investments. We don't try to minimize those costs at all. We spend everything we need to, as you saw in this quarter, to address the matters head on and do everything we can. We'll continue to experience deleveraging as the population goes down. We've been active in taking costs out of system. We'll continue to take metrical-driven cost out of the system. You've seen that from the admissions and the marketing. Occupancy remains somewhat fixed and our student-teacher ratios obviously decrease as our population goes down and we don't change the instructor level, so we're going to continuing to experience de-leverage as we go forward. In the forward quarter, I think, you will see continued cost related to our investigation. Obviously, the $5 million for the VA [ph], if we need to step up and help our students with that, is a one-time event. You will continue to see regulatory cost from the fourth quarter. You'll also see for Gary's employment agreement, the cost related to that, which you can get an estimate from it from the proxy statement.

Our next question comes from Jeff Silber from BMO Capital Markets. n

Mike, you just mentioned that your focus is on the students. I'm just curious in terms of displacement investigation, how have these results have been communicated to the students at these schools and what are plans, if they need to notify perspective students of this issue?

Sure. Jeff, as we've just recently completed the investigation for both Health and Art & Design and then moving promptly within Culinary, AIU and CTU, we just put together the data. And our first approach was to share that with the New York AG and then share that with the ACICS. We will appropriately change any placement websites that we have, be it that the DoE mandated ones or student ones that are on their own websites and in the process of doing so as we speak.

Okay. And in terms of the investigation at the other units, do you have any time frame when those will be completed?

They're being done very, very promptly. As you can imagine, with the size of AIU and CTU from a relative population, that takes longer than the other ones. And we hope and our expectation is that those will be completed within probably the next 30 to 45 days.

Our next question comes from Bob Craig from Stifel, Nicolaus. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Mike, some of your commentary earlier about leads being down substantially and conversions fairly stable differ from what we're hearing from many other organizations. Might that give you pause to rethink your marketing spend strategy and perhaps increased that spending going forward?

Yes, just to clarify, Bob, I think on the conversion rate, I spoke to a basic AIU, experiencing the same on a sequential basis. But across the board, our conversion rate was down between 5% and 10% across the companies. I think we're seeing what everyone is seeing. Our lead volume was down probably somewhere between 15% and 20%. So I think the strategy that we put in place, spending appropriately, not additional advertising spending behind lower quality leads, continue to find the best and highest-qualified students through the best trusted lead sources we have is the path we'll continue on. Robert L. Craig - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Is it possible to give us any specifics or further specifics on the changes you're making on Art & Design, what the likely impact of that is going to be on future results?

I think we'll have to wait until next year. As we've talked about -- as we've gone through significant changes in Culinary, changing all the institutions, changing the programs. We've gotten some data. We know how to do this. Art & Design is just starting as we speak. And as we go into next year, it will be a more definitive to probably give some information. Again, our goal always is to make sure these units -- each unit, at least, generates the cost of capital and is accretive to our shareholders and that's our goal as we complete it up.

Our next question comes from Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Mike, if maybe we can focus on the health business for one second, magnitude of potential either program closures or teach outs. Maybe also any color or commentary for us on kind of how the fixed cost, the lease terms, look at that business if you are in a position where you have the downside of the population a lot or give a lot of leases coming up in near term, a lot of them 5 years out. Just trying to get a sense of how the fixed costs could change in that business if population changes a lot.

Again, we're not necessary saying population is going to change a lot. What I did speak to was we're looking at teaching out certain programs that putting caps in certain programs and not looking at institutions themselves. So right now, as we look at the -- I can't comment in detail about which those would be -- we're still in conversations with various parties to make sure that they agree with the steps that we're taking. The leases for the 40 different Health campuses are obviously staggered. We will look at a campus-by-campus basis as we always do in terms of the student outcomes, the financial return to shareholders, the programs and the lease term to make sure the campus is as viable as it can be as we serve the students and we make those on a one-by-one basis. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: And just one clarifying point. Of the time frame you just gave in response to Jeff's question around the rest of the inquiries or investigations in the placement rates, is Culinary in the same kind of schedule there or do you expect that to be sooner or later or is there anything else different that you're doing with that business convert to AIU, CTU regarding placement rates?

We're along the same schedule. Our investigation is progressing well and I think as a whole, those 3 SBUs will be completed in 30 to 45 days.

Our next question comes from Sara Gubins from Bank of America Merrill Lynch.

Could you give some more clarity on what type of placement issues were found and have you spoken with the Department of Education about this yet?

The answer is yes. We have spoken to the Department of Education and all of our appropriate regulators and accreditors about the situation.

And just some more clarity on what the actual issues -- the kind of issues that you're finding are?

I think, Sara, as we said on our remarks, across the Health unit, we saw improper actions that were being taken and employees that were involved in any of those improper actions we've dealt with and addressed the employee matters. There was also across the institutions in Health and Art & Design, some inconsistencies and some inconsistencies in the reporting and the support. So as our team, our independent team looked at the placement rate, they went through and did a very thorough job to make sure every piece of documentation, every piece of placement information was provided. If, for some reason, the file was incomplete, even though there was a placement, we determine that would not be counted as a placement. So the team did a very thorough review on some improper actions in Health as we talked about and then inconsistent policy application, we look at in field and related-field placement data.

Okay. And then maybe just following up on some other questions about your costs. As we think about it for the company, as a whole, is there any way to give us a rule of thumb for what you view as fixed versus variable as you face most likely continued revenue declines in the next year?

No different than the color I've been able to provide to different analysts and yourself in the past around or the amount of our occupancy cost that is relatively fixed, administrative cost which is semi-fixed and our academic and admissions and marketing cost that is highly variable.

Our next question comes from Trace Urdan from Wunderlich.

Just following up on Sara's question, do you see the issues surrounding the improper placement rate reporting? Are these control issues or communication issues or cultural issues? Like how did this happen? I mean, firing some employees, I think seems to understate how widespread the issue is across 2 different school brands. So I'm wondering if you've spent any time thinking about a root cause here?

I think the company spent a lot of time on root cause analysis, both for the investigators and ourselves. I think the point that I talked about in terms of remediation speak to where the issues would've been. We talked about personnel. We talked about employee training. We talked about clarifying the policy. We talked about fixing and looking at the compliance oversight of those placement rates. We talked about certain programs that you maybe teach at out of that [ph]. If you look at those remediation steps, we'll then tell you what the issues we found out and we address those head on.

In your conversations with the ACICS, do you have a sense on when they are going to come back to you with what they believe to be the appropriate remedy for the schools in question?

We expect to have a dialogue with ACICS as quickly as we possibly can and I think we have already scheduled a meeting with them. This is Steve speaking. And with respect to your question, I would say that we have gone to extraordinary lengths to try to investigate this matter and identify the causes of why it cropped up in a number of places in our company. I believe that a report the we have received from independent counsel to the Board of Directors was just extraordinary. The independent counsel literally went student-by-student, so I'm not sure anybody has ever investigated its placement activities as closely as Career Education has done. And we have uncovered the fact that we’re going to be reported as placements in a number of cases and a number of places were not genuine placements according to our standards as a company. We have reported therefore accurate numbers to ACIS (sic) [ACICS] at the appropriate time, the time to report to them was 1 week or 2 ago. And we did that on time and with the results of this investigation. We have identified as you stated a myriad of possible causes of this. And as Mike has tried to detail, we have addressed all of the causes that we have been able to identify and we will continue to work on this problem until we are certain that we have it completely rooted out.

Our next question comes from Suzanne Stein from Morgan Stanley.

This is actually Thomas Allen, filling in for Susie. Can you just talk about your start trends for AIU and CTU? I believe if you adjust out the SOAR program, you'd still seen, I think, 3 or 4 quarters of down base start. Should we expect to lap that and then maybe start to improve backing out SOAR?

Yes, I think SOAR will be comparable all the way through at the beginning of the third quarter next year. The starts on adjusted basis at SOAR were around negative 20%, and you continue to see that level in the fourth quarter. As we start getting next year, the comparables will change and we're hoping that we start seeing market trend changes in terms of student interest as well as those comparables are lapping as we go to '12.

And then just in terms of revenue per student, we obviously adjusted our model for the changes you are making, but it seems like it was weaker than expected across the board, was there anything else that's going on there?

There was not -- in terms of -- you've got the credit hour changes in the AIU, which you need to look at. Again, just make sure your models are sensitive enough that you -- as you have student count, you may have student count of students that are in the SOAR program for which there'll be no revenue. So there could be noise around the recognition of revenue between the start -- the student population date and the revenue data.

Our next question comes from Amy Junker with Baird & Co. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: Mike, can you talk about how many of the ACICS accredited schools passed on the placement rate metric, if you go back to '09, that's the '09-'10 school year? And assuming you've had some schools still on the past, how did they treat those cases?

Amy, the investigation focused on the current year's reporting. As you can imagine by going back and having the independent team reaffirm everyone of our placements across everyone in the institutions that focuses on the current year and the current year data, and that is what we supplied ACICS on an adjusted basis. So I don't have the data and I wouldn't speculate on the data going backwards. We know the issue. We've given new data to ACICS and we go forward with the plans to get above 65% this year. Amy W. Junker - Robert W. Baird & Co. Incorporated, Research Division: Have there ever been though -- since at least you've been there, Mike, any cases where they have failed regardless of the integrity of the data?

If you look across our OPE IDs, remember the OPE ID structure we had with the number of different OPE IDs, within certain programs, because the placement rates are measured on program-by-program basis, there have been instances where we've been below 65% in a year and we've worked really hard to make sure that we're process in place for the next year, we're back above 65%. It's really difficult. This time though, as you look back across my past with the really soft economic environment and the difficulties for students to get jobs, the comparability of data.

Our next question comes from Kelly Flynn with Crédit Suisse. Kelly A. Flynn - Crédit Suisse AG, Research Division: Just a quick one on starts. I think you've given a lot of color but I just want to clarify, for Q4, basically do you expect them to be a lot worse year-over-year than the decline was in Q3? I think you just said in response to another question that x SOAR that will down about the same, so just the SOAR impact get worse or for Q3, it was bad, the full impact?

The SOAR impact doesn't get worse because you do had the full cohorts in the third quarter. Remember the second quarter we didn't have full cohorts, so the third quarter is the first one. So we, right now, believe we'll have comparable starts in the fourth quarter as we did in the third. Kelly A. Flynn - Crédit Suisse AG, Research Division: So down about the same amount year-over-year, you mean?

I'm not sure if I would say down or up versus the number of a comparable and overall trend that we have now.

Our next question comes from Corey Greendale from First Analysis.

I just wanted to go back to questions that Jeff asked earlier, specifically interested in what your messaging is to current students, if the question is raised over, we thought for placement it sounds like we maybe -- we weren't informed properly, how are you messaging the changes you're making and trying to ensure that those students stick around?

These numbers are current numbers. So what we'll be reporting to students is current numbers and they are to the best of our ability and to the best of the ability of independent counsel, very accurate numbers and so we will be reporting these current accurate numbers to students.

And then Mike, if I could. Some people would ask about the cost structure generally. I want to ask specifically about the Health Education segment, which I don't think you called out any nonrecurring items as being responsible for the loss in the quarter. So do you think given this level of revenue, there's a way of getting that business to become sustainably profitable?

I fully believe we can be sustainably profitable as we have been in the past with the business. I think we a significant amount of deleveraging going on. We have the startup campuses. We've invested in the last several years that we tell you about the startup number, which is the most recent year. Remember, our start up's one year after opening with campuses start ups. We have many campuses. If you look at our account that are maybe 2 years old, which aren't up to the full profitability levels of a mature campus. So once those campuses continue to grow, we'll do well. Also additionally, this has been a very thorough investigation by the Board of Directors and counsel and throughout the Health units, there has been distraction and there have been priorities to make sure that we did everything working on the investigation, the placement data issues. Everything else you've heard about that may have taken the ball up some of operations of the campuses, that as we clear this up, will be behind us.

Our next question comes from James Samford from Citigroup.

Just at a high level, Steve, you've been at the company for quite a while and seen the company go through some pretty significant changes. I was wondering if you could comment on -- interested in the magnitude of what you're facing today versus maybe some of the challenges that the company's faced in the past, perhaps 3 to 5 years ago?

I'm very optimistic today certainly compared to 3 to 5 years ago, but in the context of today, I'm very optimistic. As I point that out, I think that there's an opportunity here for the entire sector even in the aftermath of the changes that have been imposed on the industry by the Department of Education. So I think that we and other companies have a real opportunity to grow and expand and to serve a larger population of students. So when you have that fundamental belief that you're in an area that needs to grow, that needs to serve more people, more students, more consumers, you have an optimistic view. I also said earlier and meant it, that this company has broad resources including financial resources. And I think that they can be put to work for the company in meaningful ways that are going to enable it to be successful. I also tried to indicate that there's going to be a balance between dealing with our near-term compliance issues, and the longer-term need to put a strategy in place around which we can rally as an organization. And we have a head start on developing that strategy and I think that we can distinguish this company and move ahead and grow profitably in the long term.

Our next question comes from Peter Appert from Piper Jaffray.

This is George Tong for Peter Appert. I know you touched on this a bit earlier, but could you give us additional clarity on how you expect starts and enrollment trends to play out specifically whether you have any views on when either it will turn positive? And could you tell us, if you feel comfortable, reiterating your prior revenue with operating income guidance?

I don't think I can give any more color about the market trends and start trends that I have already given. In terms of our guidance, we've never given our guidance. As you know we've given out some milestones. In the beginning of the year, we've given out some milestones. You now can see that we had cost in this quarter that we're trying -- anticipated. We'll have cost in the fourth quarter in terms of Gary's employment agreement, we haven't anticipated. So I think it's important to look at where the business is after 3 quarters and to build your model and anything you need in terms of Health filling in that mosaic, we're happy to help you with.

Got it. And what are the implications of having for the 36 schools and Health and Arts & Design that didn't meet the 65% minimum placement rate standard? And could you -- do you have any specific plans on how to bring those into compliance?

I think the plans, agreement and compliance are exactly what I spoke to earlier about the change in personnel, the increase training, bringing in more career services people, making sure the policy definitions are proper, teaching out certain programs, capping certain programs. I think those all are in the right place. ACICS has a variety of different steps that they can take. Again, given the circumstances that we have, that we've been open, we've been very forthright, we've gone to them on a very proactive basis that the overall numbers for both Health and Art & Design are not materially different than 65%. We will talk to them on the individual institution-by-institution basis, and put in remedies and do as much as we can to make sure that for this year, we're above 65%.

That is all of the questions for today. I will now turn the call over back to Mr. Lesnik for closing remarks.

Thank you, Dawn. On behalf of the board, as well as our employees, I'd like to thank you, all, for joining us today and your interest in the company. As I said a couple of times, I believe we have a fundamentally strong institution and I believe we have a lot of talents among the 13,000 people who work here. As a company, we've always been transparent with you and with our other constituencies and open with all investors. And we've hopefully continued that approach today in our remarks. We appreciate that you'll have questions as you further review and think about our remarks and the materials we've issued last night. So if you do, please contact our Investors Relations team to answer any questions you may have. As they say, they'll be ready at the phones anytime. This concludes our call for this morning. Thanks for joining us and thanks for your continued interest in Career Education.

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