ITT EDUCATIONAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
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Delaware
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1-13144
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36-2061311
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(State or other
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(Commission
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(IRS Employer
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jurisdiction of
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File Number)
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Identification No.)
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incorporation)
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13000 North Meridian Street
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Carmel, Indiana 46032-1404
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (317) 706-9200
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¨
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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¨
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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¨
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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¨
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 2.02.
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Results of Operations and Financial Condition.
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Item 5.02.
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Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
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(d)
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Exhibits:
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10.1
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Third Amendment to Letter Agreement, dated as of July 29, 2015, by and between ITT Educational Services, Inc. and Kevin M. Modany
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99.1
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Press Release issued by ITT Educational Services, Inc. dated July 30, 2015.
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10.1
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Third Amendment to Letter Agreement, dated as of July 29, 2015, by and between ITT Educational Services, Inc. and Kevin M. Modany
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99.1
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Press Release issued by ITT Educational Services, Inc. dated July 30, 2015.
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Financial and Operating Data for the Three Months Ended June 30th, Unless Otherwise Indicated
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(Dollars in millions, except per share, per student data and average annual salary data)
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Increase/
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2015
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2014
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(Decrease)
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Revenue
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$ | 214.2 | $ | 238.1 | (10.0 | )% | ||||||
Operating Income
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$ | 11.6 | $ | 6.8 | 70.6 | % | ||||||
Operating Margin
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5.4 | % | 2.9 | % |
250 basis points
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Net Income
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$ | 0.7 | $ | 0.4 | 82.7 | % | ||||||
Earnings Per Share (diluted)
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$ | 0.03 | $ | 0.02 | 50 | % | ||||||
New Student Enrollment
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12,638 | 15,523 | (18.6 | )% | ||||||||
Continuing Students
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35,236 | 39,962 | (11.8 | )% | ||||||||
Total Student Enrollment as of June 30th
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47,874 | 55,485 | (13.7 | )% | ||||||||
Persistence Rate as of June 30th (A)
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68.8 | % | 70.0 | % |
(120) basis points
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Bad Debt Expense as a Percentage of Revenue
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4.1 | % | 5.8 | % |
(170) basis points
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Days Sales Outstanding as of June 30th
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19.2 days
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26.3 days
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(7.1) days
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Deferred Revenue as of June 30th
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$ | 119.6 | $ | 131.4 | (9.0 | )% | ||||||
Cash and Cash Equivalents as of June 30th
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$ | 124.6 | $ | 225.0 | (44.6 | )% | ||||||
Restricted Cash as of June 30th
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$ | 6.9 | $ | 2.8 | 150.6 | % | ||||||
Collateral Deposits as of June 30th
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$ | 97.9 | $ | 8.6 | 1034.5 | % | ||||||
Private Education Loans (current and non-current), Less Allowance for Loan Losses, as of June 30th (B)
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$ | 79.1 | $ | 73.4 | 7.7 | % | ||||||
PEAKS Trust Senior Debt (current and long-term) as of June 30th (C)
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$ | 54.1 | $ | 190.9 | (71.7 | )% | ||||||
CUSO Obligation (current and long-term) as of June 30th (D)
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$ | 111.1 | $ | 113.5 | (2.1 | )% | ||||||
Financing Agreement/Credit Agreement (current and long-term) as of June 30th (E)
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$ | 92.1 | $ | 50.0 | 84.3 | % | ||||||
Weighted Average Diluted Shares of Common Stock Outstanding
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24,086,000 | 23,785,000 | ||||||||||
Capital Expenditures, Net
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$ | 1.6 | $ | 1.1 | 43.0 | % | ||||||
Graduate Employment Rate as of April 30th
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73 | % (F) | 70 | % (G) |
300 basis points
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Average Annual Reported Graduate Salary as of April 30th
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$ | 34,500 | (H) | $ | 33,400 | (I) | 3.3 | % |
Financial and Operating Data for the Six Months Ended June 30th
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(Dollars in millions, except per share and per student data)
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2015
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2014
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Increase/
(Decrease)
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Revenue
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$ | 444.2 | $ | 476.0 | (6.7 | )% | ||||||
Operating Income
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$ | 39.3 | $ | 19.8 | 97.9 | % | ||||||
Operating Margin
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8.8 | % | 4.2 | % |
460 basis points
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Net Income
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$ | 11.2 | $ | 4.0 | 178.1 | % | ||||||
Earnings Per Share (diluted)
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$ | 0.47 | $ | 0.17 | 176.5 | % | ||||||
Bad Debt Expense as a Percentage of Revenue
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4.7 | % | 6.4 | % |
(170) basis points
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Weighted Average Diluted Shares of Common Stock Outstanding
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23,953,000 | 23,815,000 | ||||||||||
Capital Expenditures, Net
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$ | 2.5 | $ | 2.7 | (5.6 | )% | ||||||
(A)
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Represents the number of Continuing Students in the academic term, divided by the Total Student Enrollment in the immediately preceding academic term.
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(B)
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With respect to the private education loans as of June 30, 2015, the amount included $9.4 million classified as current, and $69.7 million classified as non-current. With respect to the private education loans as of June 30, 2014, the amount included $7.4 million classified as current, and $66.0 million classified as non-current.
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(C)
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With respect to the PEAKS Trust Senior Debt as of June 30, 2015, the amount included $23.1 million classified as current, and $31.0 million classified as non-current. With respect to the PEAKS Trust Senior Debt as of June 30, 2014, the amount included $132.4 million classified as current, and $58.4 million classified as non-current.
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(D)
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As of June 30, 2015, this amount represented the CUSO secured borrowing obligation recorded on the company’s balance sheet, $19.8 million of which was classified as current and $91.3 million of which was classified as non-current. As of June 30, 2014, this amount represented the contingent liability amount recorded on the company’s balance sheet related to the company’s guarantee obligations under the CUSO risk sharing agreement. Beginning on September 30, 2014, the CUSO was consolidated in the company’s consolidated financial statements, resulting in the elimination of the contingent liability related to the CUSO risk sharing agreement that the company had previously recorded, and resulting in the company instead recording the estimated amount of the CUSO’s obligations to its owners related to their participation interests in the private education loans made under the CUSO program.
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(E)
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With respect to the company’s Financing Agreement as of June 30, 2015, the amount included $14.5 million classified as current, and $77.6 million classified as non-current. With respect to the company’s Credit Agreement as of June 30, 2014, the full $50.0 million was classified as current.
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(F)
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Represents the percentage of the ITT Technical Institutes’ 2014 employable graduates who obtained employment in positions using skills taught in their programs of study as of April 30, 2015.
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(G)
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Represents the percentage of the ITT Technical Institutes’ 2013 employable graduates who obtained employment in positions using skills taught in their programs of study as of April 30, 2014.
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(H)
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Represents the average annual salary reported by the ITT Technical Institutes’ 2014 employed graduates as of April 30, 2015.
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(I)
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Represents the average annual salary reported by the ITT Technical Institutes’ 2013 employed graduates as of April 30, 2014.
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·
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$43.9 million in 2015;
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$27.0 million in 2016;
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$16.2 million in 2017; and
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·
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$84.6 million in 2018 and later, which amount includes an approximately $15.3 million payment in 2020 under the PEAKS guarantee.
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ITT EDUCATIONAL SERVICES, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands, except per share data)
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(unaudited)
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As of
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June 30, 2015
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December 31, 2014
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June 30, 2014
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 124,632 | $ | 135,937 | $ | 224,956 | ||||||
Restricted cash
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6,936 | 6,040 | 2,768 | |||||||||
Accounts receivable, net
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45,204 | 46,383 | 68,937 | |||||||||
Private education loans, net
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9,379 | 10,584 | 7,420 | |||||||||
Deferred income taxes
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24,795 | 34,547 | 67,415 | |||||||||
Prepaid expenses and other current assets
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57,294 | 57,923 | 36,056 | |||||||||
Total current assets
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268,240 | 291,414 | 407,552 | |||||||||
Property and equipment, net
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150,095 | 157,072 | 158,947 | |||||||||
Private education loans, excluding current portion, net
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69,724 | 80,292 | 65,997 | |||||||||
Deferred income taxes
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63,447 | 68,041 | 78,218 | |||||||||
Collateral deposits
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97,873 | 97,932 | 8,627 | |||||||||
Other assets
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61,921 | 54,409 | 56,878 | |||||||||
Total assets
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$ | 711,300 | $ | 749,160 | $ | 776,219 | ||||||
Liabilities and Shareholders' Equity
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Current liabilities:
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Current portion of long-term debt
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$ | 14,546 | $ | 9,635 | $ | 50,000 | ||||||
Current portion of PEAKS Trust senior debt
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23,068 | 37,545 | 132,429 | |||||||||
Current portion of CUSO secured borrowing obligation
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19,750 | 20,813 | 0 | |||||||||
Accounts payable
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76,476 | 67,848 | 75,918 | |||||||||
Accrued compensation and benefits
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16,535 | 12,264 | 23,320 | |||||||||
Other current liabilities
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27,288 | 27,050 | 46,233 | |||||||||
Deferred revenue
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119,568 | 147,475 | 131,378 | |||||||||
Total current liabilities
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297,231 | 322,630 | 459,278 | |||||||||
Long-term debt, excluding current portion
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77,579 | 86,714 | 0 | |||||||||
PEAKS Trust senior debt, excluding current portion
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31,007 | 38,658 | 58,442 | |||||||||
CUSO secured borrowing obligation, excluding current portion
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91,339 | 100,194 | 0 | |||||||||
Other liabilities
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59,049 | 52,959 | 138,361 | |||||||||
Total liabilities
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556,205 | 601,155 | 656,081 | |||||||||
Shareholders' equity:
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Preferred stock, $.01 par value,
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5,000,000 shares authorized, none issued
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0 | 0 | 0 | |||||||||
Common stock, $.01 par value, 300,000,000 shares authorized,
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37,068,904 issued
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371 | 371 | 371 | |||||||||
Capital surplus
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186,501 | 198,883 | 198,806 | |||||||||
Retained earnings
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980,833 | 969,670 | 944,431 | |||||||||
Accumulated other comprehensive (loss)
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725 | 1,201 | 2,670 | |||||||||
Treasury stock, 13,490,795, 13,619,010 and 13,665,129 shares at cost
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(1,013,335 | ) | (1,022,120 | ) | (1,026,140 | ) | ||||||
Total shareholders' equity
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155,095 | 148,005 | 120,138 | |||||||||
Total liabilities and shareholders' equity
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$ | 711,300 | $ | 749,160 | $ | 776,219 |
ITT EDUCATIONAL SERVICES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(Dollars in thousands, except per share data)
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(unaudited)
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Three Months
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Six Months
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Ended June 30,
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Ended June 30,
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2015
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2014
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2015
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2014
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Revenue
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$ | 214,231 | $ | 238,096 | $ | 444,206 | $ | 476,019 | ||||||||
Costs and expenses:
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Cost of educational services
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101,865 | 116,276 | 205,418 | 236,391 | ||||||||||||
Student services and administrative expenses
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91,408 | 97,547 | 181,660 | 196,785 | ||||||||||||
Legal and professional fees related to certain lawsuits, investigations and accounting matters
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6,005 | 8,380 | 13,291 | 13,927 | ||||||||||||
Provision for private education loan losses
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3,313 | 9,071 | 4,557 | 9,071 | ||||||||||||
Total costs and expenses
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202,591 | 231,274 | 404,926 | 456,174 | ||||||||||||
Operating income
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11,640 | 6,822 | 39,280 | 19,845 | ||||||||||||
Interest income
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22 | 15 | 35 | 34 | ||||||||||||
Interest (expense)
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(9,991 | ) | (6,263 | ) | (20,379 | ) | (13,164 | ) | ||||||||
Income before provision for income taxes
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1,671 | 574 | 18,936 | 6,715 | ||||||||||||
Provision for income taxes
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955 | 182 | 7,773 | 2,701 | ||||||||||||
Net income
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$ | 716 | $ | 392 | $ | 11,163 | $ | 4,014 | ||||||||
Earnings per share:
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Basic
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$ | 0.03 | $ | 0.02 | $ | 0.47 | $ | 0.17 | ||||||||
Diluted
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$ | 0.03 | $ | 0.02 | $ | 0.47 | $ | 0.17 | ||||||||
Supplemental Data:
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Cost of educational services
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47.5 | % | 48.8 | % | 46.2 | % | 49.7 | % | ||||||||
Student services and administrative expenses
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42.7 | % | 41.0 | % | 40.9 | % | 41.3 | % | ||||||||
Legal and professional fees related to certain lawsuits, investigations and accounting matters
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2.8 | % | 3.5 | % | 3.0 | % | 2.9 | % | ||||||||
Provision for private education loan losses
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1.5 | % | 3.8 | % | 1.0 | % | 1.9 | % | ||||||||
Operating margin
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5.4 | % | 2.9 | % | 8.8 | % | 4.2 | % | ||||||||
Student enrollment at end of period
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47,874 | 55,485 | 47,874 | 55,485 | ||||||||||||
Campuses at end of period
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141 | 148 | 141 | 148 | ||||||||||||
Shares for earnings per share calculation:
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Basic
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23,621,000 | 23,459,000 | 23,591,000 | 23,453,000 | ||||||||||||
Diluted
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24,086,000 | 23,785,000 | 23,953,000 | 23,815,000 | ||||||||||||
Effective tax rate
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57.2 | % | 31.7 | % | 41.0 | % | 40.2 | % |
ITT EDUCATIONAL SERVICES, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Dollars in thousands)
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(unaudited)
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Three Months
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Six Months
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Ended June 30,
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Ended June 30,
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2015
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2014
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2015
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2014
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Cash flows from operating activities:
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Net income
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$ | 716 | $ | 392 | $ | 11,163 | $ | 4,014 | ||||||||
Adjustments to reconcile net income to net cash flows
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from operating activities:
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Depreciation and amortization
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6,061 | 6,508 | 12,042 | 12,970 | ||||||||||||
Provision for doubtful accounts
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8,692 | 13,767 | 20,875 | 30,382 | ||||||||||||
Deferred income taxes
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2,554 | (1,594 | ) | 12,423 | (2,010 | ) | ||||||||||
Stock-based compensation expense
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1,364 | 2,311 | 3,260 | 4,862 | ||||||||||||
Accretion of discount on private education loans
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(2,948 | ) | (3,239 | ) | (6,029 | ) | (6,372 | ) | ||||||||
Accretion of discount on long-term debt
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385 | 0 | 776 | 0 | ||||||||||||
Accretion of discount on PEAKS Trust senior debt
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1,365 | 1,441 | 3,020 | 2,982 | ||||||||||||
Accretion of discount on CUSO secured borrowing obligation
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214 | 0 | 433 | 0 | ||||||||||||
Provision for private education loan losses
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3,313 | 9,071 | 4,557 | 9,071 | ||||||||||||
Other
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(148 | ) | (248 | ) | (415 | ) | (428 | ) | ||||||||
Changes in operating assets and liabilities, net of acquisition:
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Restricted cash
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(608 | ) | 1,525 | (896 | ) | 2,868 | ||||||||||
Accounts receivable
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(7,696 | ) | (5,320 | ) | (19,696 | ) | 982 | |||||||||
Private education loans
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6,601 | 4,083 | 13,245 | 8,093 | ||||||||||||
Accounts payable
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848 | 8,582 | 6,390 | 17,897 | ||||||||||||
Other operating assets and liabilities
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(1,931 | ) | (5,545 | ) | (1,214 | ) | (9,430 | ) | ||||||||
Deferred revenue
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(20,288 | ) | (10,171 | ) | (27,907 | ) | (17,400 | ) | ||||||||
Net cash flows from operating activities
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(1,506 | ) | 21,563 | 32,027 | 58,481 | |||||||||||
Cash flows from investing activities:
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Capital expenditures, net
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(1,640 | ) | (1,147 | ) | (2,509 | ) | (2,657 | ) | ||||||||
Acquisition of company
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0 | (584 | ) | 0 | (5,033 | ) | ||||||||||
Collateralization of letters of credit
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60 | 0 | 60 | 0 | ||||||||||||
Proceeds from repayment of notes
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0 | 97 | 0 | 193 | ||||||||||||
Purchase of investments
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(1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
Net cash flows from investing activities
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(1,581 | ) | (1,635 | ) | (2,350 | ) | (7,498 | ) | ||||||||
Cash flows from financing activities:
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Repayment of long-term debt
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(2,500 | ) | 0 | (5,000 | ) | 0 | ||||||||||
Repayment of PEAKS Trust senior debt
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(9,380 | ) | 0 | (25,026 | ) | (41,070 | ) | |||||||||
Repayment of CUSO secured borrowing obligation
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(6,314 | ) | 0 | (10,351 | ) | 0 | ||||||||||
Common shares tendered for taxes
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(38 | ) | (7 | ) | (505 | ) | (728 | ) | ||||||||
Net cash flows from financing activities
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(18,232 | ) | (7 | ) | (40,882 | ) | (41,798 | ) | ||||||||
Net change in cash and cash equivalents
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(21,319 | ) | 19,921 | (11,305 | ) | 9,185 | ||||||||||
Cash and cash equivalents at beginning of period
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145,951 | 205,035 | 135,937 | 215,771 | ||||||||||||
Cash and cash equivalents at end of period
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$ | 124,632 | $ | 224,956 | $ | 124,632 | $ | 224,956 |