Nov 7, 2013
Executives
Doug Craney Scott W. Steffey - Chief Executive Officer and President Colleen M.
O'Sullivan - Chief Financial Officer and Senior Vice President
Analysts
Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division Corey Greendale - First Analysis Securities Corporation, Research Division
Operator
Welcome to the Career Education Corporation Third Quarter 2013 Earnings Conference Call. My name is John, and I will be your operator for today's call.
[Operator Instructions] Please note that the conference is being recorded. And I'll now turn the call over to Doug Craney.
You may begin, Doug.
Doug Craney
Thank you, John. Good morning, everyone, and thank you for joining us on our third quarter 2013 earnings call.
With me on the call this morning are Scott Steffey, 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 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. I would like to remind you that as we reported in yesterday's 10-Q filing and press release, our international business segment is now being reported as a component of discontinued operations.
Results for all periods presented have been recast to reflect this change and the comments made on the call today will focus on continuing operations. Before I turn the call over to Scott, 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 to those factors identified in our annual report on Form 10-K for the year ended December 31, 2012, and our other filings with the Securities and Exchange Commission.
Except as expressly required by the securities laws, we undertake no obligation to update those risk factors or to publicly announce the results of any of these forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, the remarks today may refer to non-GAAP financial measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures.
Our press release, which contains financial and other quantitative information to be discussed today, is available within the Investor Relations section of our website at careered.com Now let me turn the call over to Scott.
Scott W. Steffey
Thanks very much, Doug. Good morning and thank you for joining us.
It's been a extremely busy quarter and I have a lot to cover with you to help you connect the dots with all the progress that we're making. I will first start off with a brief discussion of our quarterly results, including providing an update on actions we've been focusing on throughout the quarter and then share with you key aspects of the strategy which was reviewed with our Board of Directors last month.
Following my comments, Colleen will provide additional detail and color on the third quarter results and then we'll be happy to take your questions. Looking at our results for the third quarter, overall, we are seeing steady progress on arresting the decline of our performance.
We posted total revenue of $251 million and an operating loss of $69 million in the third quarter of 2013. Our operating loss continues to be in line with our expectations as we make progress in our turnaround strategy.
In discussing our performance, I'll cover things in the order in which we continue to emphasize our priorities with our internal people. We use the phrases enroll, educate and place, we have definitions around that, but I'll just use that to discuss improvement that we're making in each of those segments.
Let me start with how we're enrolling improvements that we're seeing there. We're continue to see positive trends in new enrollments with year-over-year declines growing smaller as the year has progressed.
Overall, new enrollments across our continuing operations excluding transitional campuses were down 10% from the same quarter last year. That compares to a decline of 19% in the second quarter and 20% in the first quarter.
We also continue to see positive trends in the number of applications received. The increase in applications across AIU and CTU can be attributed to changes made in their intake model which I spoke to during our last quarter call.
We're now beginning to see the changes made in our interactions with students and shifts in marketing strategy result in improvement in new enrollments. As I also shared previously, an increase in applications often precedes an increase in new student enrollments by several months.
Nothing that we're seeing, however, suggest that the business is behaving in anything other than a normal fashion. Our career school teams also have made targeted changes to their student intake strategies which are resulting in upticks in new student applications as compared to the prior year.
Our conversion rates have also been steadily improving throughout the year. In Career Schools, our conversion of new student inquiries into applications was 5.4% in the third quarter, up from 5.1% in the second quarter and 4.9% in the first quarter.
For our universities, conversion was 2.9% in the third quarter, up from 2.3% in the second quarter and 1.8% in the first quarter. So we continue to make progress.
I'd also like to note briefly the actions we've taken in response to the new expressed written consent regulations that went into effect a few weeks ago. We have worked proactively with each of our lead aggregators to understand how they are intending to approach the new regulations.
Our approach has been conservative, since regulatory and legal guidance on this new regulation is still uncertain. We have augmented our admission staff and adopted a practice to manually dial those leads for which a prospective student has not provided approval to be called with automatic dialing techniques.
While still early, we are not seeing any material change in our inquiry volumes based on this new regulation. We will continue to monitor this closely as time passes and we may make adjustments to our approach as acceptable practices are clarified over time.
We remain committed to identifying innovative program offerings and areas of differentiation in each of our institutions. Regarding AIU specifically, as I mentioned last quarter, we are working toward expanding our pricing strategies aimed at providing students with varying alternatives to completing their course of studies in an affordable and efficient manner.
We are targeting an introduction of these expanded offerings in early 2014. Overall, we're making solid progress establishing more efficient enrollment process.
The improvement results I've outlined in applications, conversion rates, and new student enrollments illustrate that actions we've taken to improve our enrollment operations are taking hold, stabilizing our organization and preparing us for future success. Now moving on to arguably our most important priority, how we educate our students.
As we focused on quality of education we are providing to our students, retention is a very key metric. We experienced a 90 basis points increase in student retention over the third quarter last year in our University segment.
Overall, our retention rate was 80 basis points higher than the second quarter of this year. Retaining students through graduation continues to be a point of emphasis across our organization.
We intend for these retention rate improvements to continue over time and to provide continuing evidence that the improvements we are making are resulting in improved persistence for our students. As I previously -- as I've said previously, the best testament to our institution is a satisfied graduate.
Another key part of our efforts to educate students is to continue investing in technology innovations. Last quarter, I spent a great deal of time discussing the full-scale rollout of our intellipath adaptive learning platform.
As I discussed then, the decision engine behind intellipath adaptive learning assesses what each student knows coming into a course and creates a customized learning map adjusting course content along the way as it determines where students are having trouble, or where they might need a greater challenge to remain engaged. So far, more than 18,000 students have taken an intellipath adaptive learning course.
That number will continue to grow as an increasing number of our courses at AIU and CTU are mapped for adaptive learning. We have also made significant progress towards rolling out our intellipath adaptive learning to our career school campuses, both online and on ground.
We have extended the continual realtime assessments of intellipath adaptive learning engine to our orientation process at AIU and CTU to better assist students in becoming acclimated to the rigors of online learning and to better allow us to assess which students are prepared and which may not be well positioned for success. This use of adaptive learning in our student orientation program is well aligned with our continued objective to improve outcomes for our students.
At all of our schools, we will increase the integration of technology, including adaptive learning in the curriculum to improve the student outcomes. We will also emphasize the value of partnerships, agreements and educational pathways to help our students understand the opportunities they have continued -- they have to continue their education, including through online and hybrid programs and earn higher level credentials which generally yield incrementally higher wages and job opportunities.
Beginning in January, AIU will introduce a new grant, the AIU Milestone grant for first-time undergraduate students. Students that successfully complete their first quarter of studies and continue with their education will be recognized for their success with a grant equivalent to a free class, awarded in their second quarter.
We believe a milestone grant is an important component of our comprehensive on-boarding strategy that encourages success during the critical first quarter of transitioning into the program. And lastly, place.
We must excel in placing students in careers or on a more positive career path. As I have spoken to on previous calls, we have experienced an increase in placements across our Career Schools.
The organization has put a tremendous emphasis on improving both its career placement process, as well as its outcome over the past 2 years, and we're seeing that pay off. For the 2013 cohort, which we are in the process of filing, over 90% of our 38 nationally accredited ACICS campuses are not in teach-out -- that are not in teach-out, expect to report higher placement rates than they reported for the 2012 ACICS reporting year.
In addition, 25 of our 38 campuses met the new higher ACICS benchmark placement rate standard of 70% of graduates. Of the remaining 13 campuses, 13 are below the minimum compliance standard.
The additional 10 fall below the benchmark standard, although they are above the minimum compliance standard. We anticipate these 13 campuses will continue to be subject to increased levels of accreditation oversight.
At the same time, ACICS has increased its rates, we have improved our placement results and we have done this in a period when the employment market remains challenging for students. We still have work to do and are committed to our career placement efforts.
It's important to note that we have made great strides in this area and it's something for which our people should be proud. Now turning to strategy.
As I mentioned on our last call, we were considering options for assessing capital to provide flexibility and executing on our strategy, balancing our short-term needs against our long-term strategies to return to growth. I'm pleased to say that we have made considerable progress.
As we have disclosed in our press release 2 weeks ago, we have entered into a definitive agreement to sell our European assets to the private equity group, Apax Partners. Our entire international schools segment comprised of the Paris-based INSEEC Group in the International University of Monaco, is included in this transaction.
For reference, this segment reported revenue of $128.6 million last year, representing approximately 9% of our consolidated revenue. This is a key step in our restructuring efforts.
Redeploying capital from Europe to the United States will help us best serve the most -- the vast majority of our students who are U.S.-based, and returns great value for our investors. The cash from the transaction will improve our options for accelerated -- accelerating future growth.
The appreciation in share price following the announcement of this agreement further illustrates to me, that the value of our European operation was not appropriately reflected in our share price. I believe that this transaction is the right thing to do for our investors at this time and for the future of Career Education.
The value of the INSEEC Group and the International University of Monaco has grown tremendously over the last decade. For perspective, Career Education purchased INSEEC for approximately $19 million in 2003.
The value that has been created in that business over the past 10 years through organic growth and strategic acquisitions, is a testament to the leadership provided by Catherine Westbender [ph] and her team in France. We expect the transaction to close by the end of the year, following completion of customary conditions to closing which include any trust approval.
As a result of this transaction, Career Education would be among the most cash liquid companies in our sector. This positions us well to deploy our assets to rebuilding our educational institutions in the United States, remain compliant with our financial responsibilities to U.S.
Department of Education and to consider other potential ventures. Our near-term focus and attention is making our education assets in the United States stronger.
The sale of our international business reduces certainty -- certain complexities and sharpens that focus. However, we keep an option open to the possibility of future international investment, including an agreement in principle with Apax Partners to explore education investment opportunities in other geographies where INSEEC might expand.
Should the right investment opportunity present itself through this relationship, we would certainly reconsider reentering the international market. I'm also pleased to report that we have received a commitment from BMO Harris Bank NA to extend our existing credit agreement to January 2015 under the same terms and conditions as the current facility.
We are also discussing revised terms and conditions for our facility that would replace our existing facility subject to the consummation of the sale of our international operations. Now let me turn to some strategic points with regards to how we're going to simplify our regulatory exposure in our organization.
Shortly after our last call, I made the decision to move Lysa Clemens from her role overseeing our rightsizing and reengineering initiatives to naming her chief Career Schools officer. Lysa is an outstanding leader with years of experience at Strayer University and the University of Phoenix.
She has been busy implementing our strategy with the guiding principle that we must simplify our structure so our organization runs more smoothly and with reduced regulatory exposure. With that in mind, we made significant changes to the structure and leadership of our Career Schools last month.
As part of these organizational changes, we have also added significant industry experience to the team naming experienced education leaders in operations, academics and enrollment. We have also announced new leadership for each education group within the Career Schools segment.
Strategically, I think it makes sense to consolidate the Design & Technology and Health groups to give us greater flexibility in the market in terms of what programs we offer. It also allows us to gain efficiency through reduced headcount and eliminate duplicative marketing expenses.
The new combined Design, Technology and Health Education group is now led by Jim McCoy, who joined us last month as Vice President of Operations, Career Schools. I worked with Jim at Strayer University, where he was a key player for nearly 20 years.
Jim has experience in effectively running an organization with dozens of campuses, serving thousands of students across multiple states. His experience includes centralization of Strayer's business office operation, while improving operational academic performance, enrollment growth, student satisfaction, policy compliance and financial performance.
He also has front-line experience as a campus Director and Dean at Strayer's first campuses outside the Washington, D.C. area.
I'm confident in his ability to lead our Design, Technology and Health campuses to achieve efficiency and quality gains that help us better deliver excellent education to our students. Our Culinary education group remains a critical but distinct component of Career Schools.
It is now led by Vice President of Operations, Anna Vasquez, a 10-year veteran of Career Education, who was promoted into that role after spending most of her tenure serving Le Cordon Bleu on financial and operational issues. This structure recognizes that our Le Cordon Bleu schools, one of more most recognized and respected brand names, should stand alone and that providing high quality hands on Culinary education is unique among our group of schools.
Our focus will be on leveraging the strength of Le Cordon Bleu brand and further differentiate our Culinary schools by emphasizing the tradition of the French cooking model. In another experienced addition to our Career Schools management team, we have recently hired Randy Jones as Regional Vice President of Operations for Culinary.
Randy has nearly 20 years of higher education experience, most recently as Senior Vice President of Mid-Atlantic operations at Strayer University, overseeing university's largest region. Randy was a colleague of mine at Strayer University where he worked for more than 10 years.
He will oversee operations of the Le Cordon Bleu campuses in our East region where his experience in operations and marketing will serve us well. I will be remiss if I didn't also mention that we have promoted Dr.
John Woods to Chief Academic Officer for Career Schools. In this role, Dr.
Woods is responsible for evaluating quality and marketing applicability of our programs, training our faculty and improving the effectiveness and efficiency of our academic processes. He has nearly 20 years of higher education experience, including with Rasmussen College, Collegiate [ph] and Deltak.
He also holds a PhD in higher education administration from Bowling Green State University where he specialized in adult learning and training and development. It all starts with academic quality, high quality programs that lead to excellent job placement results and better enrollment through better references and word-of-mouth.
Dr. Woods will strive to ensure the quality of our academic programs is always improving.
And Dr. James Chitwood has joined us as Vice President of Enrollment Management, overseeing admissions operations for Career Schools.
Jim's experience includes serving as President of Ashford University, as a campus President for Argosy University, overseeing various state operations for the University of Phoenix and as a Vice President at a third-party service provider of marketing, admissions, finance and operations services to traditional higher education institutions. Jim has also worked with Lysa Clemens previously and he will help us manage our enrollment processes, making sure we have the right tools and processes in place to manage the entire student life cycle from taking new applications and starting new students to retaining those students who enroll in our institutions.
While we must increase enrollment at our Career Schools, it must be done with a keen eye toward program completion and placement opportunities for our students. Jim started his career in admissions, wrote his dissertation on enrollment performance and built his experience over a decade of running operations.
He has a keen understanding of the student life cycle. Jim will strive to ensure enrollment gains are achieved with quality and sustainability.
In addition to simplifying our organizational structure, we are taking actions to consolidate some of our brands within our nationally accredited institutions. By expanding admission and educational program offered at some campuses, we can better respond to student interests and local workforce needs.
Having a greater number and diversity of programs at comprehensive -- at comprehensive campuses, we can manage our enrollments to align with current and future placement opportunities and can optimize our program offerings in order to do meet the needs of our students and employers. This consolidation will allow us to become smarter and more efficient from our operation -- operations perspective by optimizing our real estate footprint and allowing us to focus our marketing efforts on a smaller number of brands.
We will be begin to implement this strategy in locations where we have a Health campus and a Design & Technology campus that are in close proximity of each other. In these situations, we will work to combine the educational resources and programs of each campus to form a single comprehensive institution.
We are planning to serve with programs that meet market needs, that can cross that entire spectrum, with a particular focus on Health & Technology programs. These kinds of programs tend to generate higher levels of employer demand and therefore, will better prepare us if the new gainful employment regulations now being considered by the department of education take effect.
We are already in discussions with our accreditors and regulators in states where we plan to implement this new model first. We received positive reactions so far, given that a more comprehensive mission allows us to respond more quickly to local employer needs and the plan reduces administrative redundancies associated with our current model.
Of course, at the right time, we will spend considerable time and energy informing our students about this change and helping them to see the benefits of attending campuses that offer a greater number and variety of educational programs. We will provide more specifics on this initiative once we have the appropriate regulatory approvals and have communicated with faculty, staff and students who are being given the opportunity to become part of a more comprehensive career college.
I should have more news to share on this next quarter. Lastly, we recently made the decision to teach-out 6 campuses.
One was announced in August, the remaining 5 in October. As you know -- may know, a teach-out is designed to afford students a reasonable opportunity to complete their program of study before their campus is ultimately closed.
The campuses selected were Sanford-Brown locations in Phoenix, Cleveland, Pittsburgh and White Plains, New York, as well as the International Academy of Design & Technology campuses in Detroit and Sacramento. In the fourth quarter, these campuses will join our Transitional Schools group which has been doing an excellent job of serving our students well, throughout the teach-out process.
We considered many data points in making these difficult teach-out decisions, including enrollment, financial viability, employment opportunities for graduates in the local market. With these moves, we believe we now have core campuses -- the core campuses upon which we are stabilizing our organization and with which we will once again grow.
As part of our culture of continuous improvement, we will regularly assess the performance across our organization. Now let me move to some comments on strategy as we position the company for growth and profitability.
Thinking about the organization as a whole, we've made excellent progress in our efforts to rightsize and reengineer Career Education, so that we're well positioned for growth and a return to profitability. As part of these efforts, we continue to reduce our centralized general administrative expenses to bring them more in line with others in the sector.
In previous quarters, I've mentioned a target of at least $25 million in savings this year from our rightsizing and reengineering initiatives that were identified earlier in the year. With the majority of these actions already implemented, I'm happy to report that we are expecting close to the $35 million in savings related to these initiatives in 2013.
These actions, combined with our decision to exit certain campus locations, our continued focus on lowering metrically driven costs and improving the utilization of our existing real estate footprint have resulted in well over $100 million in operating expense reductions year-over-year through the third quarter of 2013. As we look at the full year, we are expecting operating expenses, excluding impairment charge to be lower than last year by approximately $175 million.
We are estimating that an incremental $75 million to $100 million in operating expenses will come out of the business in 2014 as we receive a full year of benefit of our cost savings initiatives, complete the teach-out process at more campuses and generate other efficiencies. While many of these actions have resulted in impacts to our employee base, I am confident we have made the necessary decisions to position the company for improvement in the future.
While adjusting, our cost structure has been critically important, it is also important for us to continue laying the groundwork for future growth. One aspect of that must be to deploying national partnerships with companies looking to offer educational opportunities to their employees.
We need to improve our results in this critical area for our schools. So I'm pleased that we've hired Anne Berger as Vice President of educational alliances for American Intercontinental University.
Anne worked for Strayer University for 9 years during which time she built alliances with companies, government and other educational institutions to attract more students. She grew national accounts and signed articulation agreements with more than 150 2-year community colleges, leading to enrollment growth from transfer students.
She will be focused on developing similar programs at AIU. Now looking ahead, I have generally not been a big believer in providing detailed guidance, but at this important juncture, I think it is important for you to understand how we're seeing our business and how we're viewing things now and over the next 24 months.
The team remains laser focused on executing against the strategy I just laid out while we continue to work to optimize our expense structure. We expect to see stabilization within our Career Schools and modest growth in new student enrollments within our universities as we move through 2014.
As I mentioned earlier, we're seeing an increase in application, so we believe this is a reasonable assumption for our University segment. Over the same time period, we will experience a stair step down in the operating losses within our traditional -- within our Transitional Schools as their operations wind down.
As previously shared, approximately half of the Transitional Schools will have completed their teach-out by the second quarter of 2014 and we expect to exit 2014 with 10 campuses remaining in the Transitional Schools group. Next year, we anticipate taking a significant step towards eliminating our losses with the expectation that overall Career Education will be EBITDA positive in 2015.
Obviously, that excludes any potential one-time or nonrecurring events. Finally, I understand that with all the change now in the works at Career Education, it may be a challenge to model our business.
As I mentioned on my first call with you back in May, my goal is to provide greater transparency to investors. With that in mind, we intend to participate in several investor type events in 2014.
This should provide you with an opportunity to meet with some of our leadership team and better understand our strategy and business going forward. In closing, before turning the call over to Colleen, I have one additional item I would like to call to your attention.
We remain on track to receive preliminary approval of the derivative and securities litigation settlement. As I indicated on our second quarter call, we believe the settlement will be fully covered by insurance and should be finalized by year end.
I'm happy to have this case largely resolved and we plan to continue to make progress on our other outstanding litigation items. With that, I will turn the call over to Colleen to discuss further details on our third quarter results.
I look forward to answering your questions at the conclusion of her remarks.
Colleen M. O'Sullivan
Thanks Scott. Good morning, everyone.
Let me first start by reminding you that the third quarter results include a few items that impact comparability to the prior year quarter. The first was $11.6 million or $0.11 per share in noncash impairment charges primarily related to our Le Cordon Bleu trade name.
In addition, the third quarter also included cost related to exiting office space and severance, which together were approximately $3.8 million or $0.04 per share. Scott spoke about the rationale behind our pending international sale, but let me take a minute to talk about the financial elements of that transaction.
As the company is committed to have planned to sell our international assets during the third quarter, the earnings associated with the business could no longer be considered permanently reinvested overseas. As a result, we reported a $39.9 million or $0.60 per diluted share tax expense in the third quarter.
This tax expense and all other accountings for the transaction will be reflected within discontinued operation. Through movement of cash from an international operations, prior to the closure of the transaction, along with the payment expected to be received at closing, we anticipate that our domestic cash position will increase by approximately $290 million.
We are estimating the gain on sale to be approximately $120 million to $130 million. From a tax perspective, the taxes attributable to the expected gain on sale will largely offset the tax benefit recognized in 2013, related to our domestic operating losses reported in the year.
We do, however, believe that we may ultimately have a slight tax payment related to the year end of 2013, assuming the transaction closes before year end. Given that the closing date has not yet been set, the estimates above are subject to change.
Now let me provide you an overview of financial performance for the quarter. Our consolidated operating loss of $69 million was driven primarily by declining total enrollments across our institutions and the $11.6 million of impairment charges that I mentioned earlier.
Overall, new student enrollments, excluding Transitional Schools were down 10% from last year, while the total enrollments on a similar basis declined 16% versus the third quarter of 2012. Turning to financial results by operating segment.
First, the Career Schools Education Group. In the third quarter, revenue of $103 million decreased 19% while new student enrollments declined 6% and total enrollments decline 22%.
Together, these institutions reported an operating loss of $48 million during the third quarter, which includes $10.9 million of impairment charges. As with the case in the second quarter, we continue to see better conversion rates, resulting in higher applications at all of our Career Schools in the third quarter.
Specifically, changes to our marketing strategy for our Health and Design & Technology schools have resulted in a more efficient mix of inquiries and higher inquiry to application rate. Our rate of new student enrollment decline is trending favorable on a year-to-date basis this year as compared to last year.
In addition, a portion of the decline in new student enrollments this quarter can be attributed to our White Plains, New York campus, for which we announced this teach-out in August. Constantly -- consequently, we're comparing a partial quarter of new student enrollments at this campus to a full quarter last year.
This accounted for approximately 4% of the 5% decline in new student enrollments at our Health Education schools and approximately 1% of the 6% decline in new student enrollments for total Career Schools. The remaining decline in new student enrollment can be partly attributable to the impact of our readiness assessment program, challenging marketing conditions and a decline in our show rate most notably within our Culinary campuses.
Work to improve our processes is ongoing and our new leadership team at Career Schools is focused on improvements in this area. Now moving to the University group.
In the third quarter, new student enrollments declined 22% and 7% at AIU and CTU respectively. As you'll recall, changes to our new student readiness programs made in late 2019, negatively impact this result.
As Scott mentioned, we continue to see improvement in new student enrollment trends. For the third quarter, AIU revenue of $56 million was 20% -- 21% lower versus the third quarter of 2012.
As total enrollments at AIU decreased 19% compared to last year. Operating losses at AIU were $5.9 million in the current quarter compared to operating income of $1.1 million in the prior year quarter.
Revenue for CTU of $82 million was down 5% versus the third quarter of 2012, as a 7% reduction in total enrollment more than offset modest increases in revenue per student. Operating income at CTU was $9.2 million compared to $10.3 million in the prior year quarter.
University applications were again higher in the quarter as we continue to make meaningful and positive changes to our initial student intake processes, including embarking on new marketing campaigns during the traditional back-to-school season, social media engagement and enhancement to our website. These efforts are beginning to yield results as we are seeing improvement in our new student enrollment numbers compared to the June quarter end in both AIU and CTU.
And in fact, our August new student enrollments at CTU were the first positive comp since 2010. Moving to our Transitional School segment.
These institutions continue to operate as expected and in some cases, favorable to our internal cost expectation. Earlier, Scott mentioned the announcement of 6 additional teach-out locations.
The annual revenue and operating losses of these 6 campuses was approximately $45 million and $8 million respectively in 2012. Similar to the process the company undertook in 2012, we performed a thorough analysis, including operating performance, student outcome and strategic implications.
In connection with our decision, we anticipate recording approximately $4 million in impairment and severance related expenses in the fourth quarter of 2013. In summary, our Transitional segment will be comprised of 32 campuses that are in the process of being taught out.
Our fourth quarter results will reflect the additional 6 campuses as a component of Transitional Schools with prior period, appropriately recast, to be presented on a consistent basis. As we end 2013, we anticipate having approximately 30 campuses remaining within Transitional Schools as 2 locations are scheduled to complete their teach-out process in the fourth quarter.
Furthermore, as Scott mentioned, approximately 13 more campuses are scheduled to complete their teach-out in the first half of 2014. With the additional 6 campuses being included within Transitional Schools, our expectation is that this segment will incur operating losses of approximately $90 million in 2013, excluding the impact of remaining lease obligation charges and other unusual items.
Now let me update you on our financial position and liquidity. As of September 30, 2013, the company had cash, cash equivalents and short-term investments of $96 million.
Net cash flow used in operating activities for the 9 months ended September 30, 2013, was $78 million and capital expenditures were $16.6 million or 1.8% of revenue. The sale of international and the redeployment of cash from Europe to the U.S.
will provide us with added flexibility to execute our strategic plan, while at the same time, support our working capital needs, capital expenditures and lease commitment to the foreseeable future. We expect to exit 2013 with approximately $375 million in domestic cash.
And so with that, operator, let's open the call for questions.
Operator
[Operator Instructions] And our first question is from Jason Anderson from Stifel, Nicolaus.
Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division
Quick question on the cost reductions. If I hear your right, it sounds like a good chunk of that is from the kind of the run-out of the Transitional Schools, is that -- one is that correct?
And I guess if you could provide any additional color on the break-out of that. If there are any other operational improvements, obviously, you did announce, you talked about some of the changes in the Career School segment too, so if you could.
Colleen M. O'Sullivan
Sure. Jason, I would say that well over half of the cost that we spoke to in the prepared remarks are attributable to both -- to your points of run-off and the Transitional Schools as well as permanent reductions in our cost structure.
So we look at those as a permanent cost coming out of the organization.
Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division
Okay, great. I know you touched a little bit about pricing for AIU and announcing more later on, I guess.
Is there anything, maybe if you could recap if there has been any pricing changes overall, maybe a summary of the various segments? And any further color maybe what the plans might include there on AIU or if you're complicating anything on CTU also, that in light of what a lot -- what you're seeing across a lot of the sectors, a lot of pricing/scholarship changing, addressing the affordability issue.
Scott W. Steffey
Yes. We haven't made any pricing adjustments thus far.
Everything that we're looking at is really for 2014. We are very, very focused on how we provide a value proposition to our student.
And so we're very mindful of that. We have, obviously, the grant program that I talked about today at AIU.
We'll see how that plays out. If we like the results, we may expand it into other areas if it appears that it would also help other institutions in a similar fashion.
As I mentioned, we also have some program offerings that we're going to bring forth at AIU that we think have some very positive value proposition opportunities for our students and positions us well competitively. We are doing a similar kind of analysis on the Career Schools side.
I'm not ready to lead with anything at this time. But it's safe to say that I think the value proposition and how we price ourselves, or utilize grants or other opportunities that we have to differentiate our value proposition to students is something that we'll continue to talk about in future quarters.
Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division
Great. And one more if you don't mind.
Any chance that you could comment on any consideration of other asset sales?
Scott W. Steffey
I see myself as a very responsible CEO. It's -- what I do is I look at how we deployed assets and cash and whether they're deployed appropriately for a time periods that we foresee certain types of operations.
So I do that with everything we have and I've said that since day 1. I'm -- at the same time, I'm happy with the portfolio that we are operating right now.
Operator
Next question is from Geoff Lee[ph] from Wells Fargo.
Unknown Analyst
Just the performance at CTU this quarter was much better than AIU. Could you talk about what you think might be driving that?
Scott W. Steffey
Yes. You popped in and out there a little bit, so just so that I understand the question well, you said that the performance at CTU was better than at AIU, if I heard that[indiscernible].
Unknown Analyst
[indiscernible] starts, student starts.
Scott W. Steffey
Yes. I think the correct way for me to answer that is, we're doing some different things at the different institutions on the scaling of our intellipath products and based on how well we're doing that in certain areas and during our training, we're seeing some small results that are impacting some of the margins on that.
AIU is also blazing the trail in a couple of areas in some experimental things that we're doing on the inside process. And that sort of the benefit that we have of running the 2 operations that while they're serving distinctly different sets of students, on various operational things, we will experiment at one institution and if we're finding some progress, we'll cascade it over to the other institution.
So it's -- at this point, it's not a lot of difference other than different things that we're experimenting with, with regards to student intake process.
Operator
And we have a question from Corey Greendale from First Analysis.
Corey Greendale - First Analysis Securities Corporation, Research Division
I appreciate the clarification on the cash balance and also Scott, I appreciate your sympathy on the challenges in modeling. I just want to clarify on the cash balance, I heard what you're saying about the tax impact, netting out the tax benefit from operating losses.
But just to clarify that, the cash balance that you suggested for the end of the year and that's $375 million in domestic, is that already after any tax impact? Or could there be some -- some a meaningful payment in 2014?
Scott W. Steffey
Okay. The end of your cash, domestic cash target that we're seeing is $375 million.
Our tax exposure on the international deal is quite low. We're -- We have some losses that we can apply to that.
We see our exposure -- that will be paid in 2014. We see our exposure there, somewhere between 0 and $15 million.
Corey Greendale - First Analysis Securities Corporation, Research Division
And then, Scott, you spoke to directionally, what you're expecting to happen on enrollment and the cost savings. But can you give us some sense -- is your expectation that at some point in 2014, you hit kind of a cash -- cash flow breakeven run rate or what are your thoughts on that?
Scott W. Steffey
The way that we look at 2014 right now, we're still going to have some negative influence on cash. It's going to significantly different than the 2013 results that we're now looking at.
So it's going to be a stair step down in terms of use of cash. We've got some noncash items that will contribute to what we're seeing as a loss in 2014.
So it will be a very significant stair step down in terms of cash and it won't impact us in magnitude of 50% less, maybe greater from the standpoint of the impact to us in 2014. So that's the way we're looking at it right now.
So it's a significant step down.
Corey Greendale - First Analysis Securities Corporation, Research Division
Okay. And let me ask a very related question, and I'm not sure if you'll answer this, but a question for the board is asking which is kind of in a reasonable scenario, maybe a little bit discounted from what you think is going to happen, what's the cash flow?
How much buffer will you have?
Scott W. Steffey
Well, we have -- let me go at that in a couple of different ways. With the $375 million that we're projecting to have in the year, our low point of cash tends to happen around June and July.
There's nothing about our cash position in that period -- for the period that we're forecasting that gives me any concern whatsoever.
Corey Greendale - First Analysis Securities Corporation, Research Division
Okay. And then more granular, given the trends -- the favorable trends you're seeing in applications in the University segment, do you think that starts -- that should be up year-over-year in Q4?
Scott W. Steffey
I'm not going to -- I've gone about as far as I want to go in terms of giving any kind of forecast and guidance. Suffice it to say, I've said it now for 2 quarters, our applications are improving.
That should read -- that should result in increased enrollments. We're seeing the applications and we're seeing the business behave as it should behave.
Corey Greendale - First Analysis Securities Corporation, Research Division
Okay. And just one last, the scholarship at AIU, the idea that this is kind of one-time only, you take the first class and then you get the second one free, or would you look at you take the third class, and you get the fourth one free?
Scott W. Steffey
As I said in the previous question, we are going to continually look at what our value proposition is to our students and I expect to talk about that over many quarters into the future.
Corey Greendale - First Analysis Securities Corporation, Research Division
But as of now, it's only a one-time thing?
Scott W. Steffey
It's not a one-time thing. It's for people that are moving from one part of the program to the next part of the program.
Operator
And that was our final question. I'll turn it back over to Scott Steffey for final remarks.
Scott W. Steffey
Great. Hey I want to thank you once again for your time this morning.
We are very excited about the strategy we've put forward and all the changes we've implemented. While there remains a lot of work to be done, I believe we are positioning ourselves very well for future success.
And I look forward to sharing more about our progress over the course of the next year. Thanks so much.
Operator
Thank you, ladies and gentlemen. That concludes today's conference.
Thank you for participating, you may all disconnect at this time.