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 9.01.
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Financial Statements and Exhibits.
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(d)
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Exhibits:
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99.1
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Press Release issued by ITT Educational Services, Inc. dated November 5, 2015.
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99.1
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Press Release issued by ITT Educational Services, Inc. dated November 5, 2015.
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Financial and Operating Data for the Three Months Ended September 30th, Unless Otherwise Indicated
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(Dollars in millions, except per share 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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$ | 203.2 | $ | 242.6 | (16.2 | )% | ||||||
Operating Income
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$ | 12.5 | $ | 6.8 | 84.5 | % | ||||||
Operating Margin
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6.2 | % | 2.8 | % |
340 basis points
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|||||||
Net Income
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$ | 1.7 | $ | 10.3 | (83.6 | )% | ||||||
Earnings Per Share (diluted)
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$ | 0.07 | $ | 0.44 | (84.1 | )% | ||||||
New Student Enrollment(A)
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14,943 | 18,317 | (18.4 | )% | ||||||||
Continuing Students
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33,288 | 38,784 | (14.2 | )% | ||||||||
Total Student Enrollment as of September 30th (A)
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48,231 | 57,101 | (15.5 | )% | ||||||||
Persistence Rate as of September 30th (A)(B)
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69.5 | % | 69.9 | % |
(40) basis points
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Bad Debt Expense as a Percentage of Revenue
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3.4 | % | 6.9 | % |
(350) basis points
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Days Sales Outstanding as of September 30th
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19.4 days
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26.0 days
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(6.6) days
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Deferred Revenue as of September 30th
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$ | 121.3 | $ | 144.0 | (15.8 | )% | ||||||
Cash and Cash Equivalents as of September 30th
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$ | 131.5 | $ | 204.2 | (35.6 | )% | ||||||
Restricted Cash as of September 30th
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$ | 5.7 | $ | 6.0 | (5.0 | )% | ||||||
Collateral Deposits as of September 30th
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$ | 97.9 | $ | 8.7 | 1020.2 | % | ||||||
Private Education Loans (current and non-current), Less Allowance for Loan Losses, as of September 30th (C)
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$ | 74.9 | $ | 94.6 | (20.8 | )% | ||||||
PEAKS Trust Senior Debt (current and non-current) as of September 30th (D)
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$ | 48.0 | $ | 140.5 | (65.9 | )% | ||||||
CUSO Secured Borrowing Obligation (current and non-current) as of September 30th (E)
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$ | 111.6 | $ | 122.5 | (9.0 | )% | ||||||
Financing Agreement/Credit Agreement (current) as of September 30th
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$ | 89.0 | $ | 50.0 | 78.0 | % | ||||||
Weighted Average Diluted Shares of Common Stock Outstanding
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23,937,000 | 23,703,000 | ||||||||||
Capital Expenditures, Net
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$ | 3.3 | $ | 1.8 | 84.1 | % |
Financial and Operating Data for the Nine Months Ended September 30th
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(Dollars in millions, except per share 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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$ | 647.4 | $ | 718.6 | (9.9 | )% | ||||||
Operating Income
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$ | 51.8 | $ | 26.6 | 94.5 | % | ||||||
Operating Margin
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8.0 | % | 3.7 | % |
430 basis points
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Net Income
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$ | 12.9 | $ | 14.3 | (10.4 | )% | ||||||
Earnings Per Share (diluted)
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$ | 0.54 | $ | 0.60 | (10.0 | )% | ||||||
Bad Debt Expense as a Percentage of Revenue
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4.3 | % | 6.6 | % |
(230) basis points
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Weighted Average Diluted Shares of Common Stock Outstanding
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23,947,000 | 23,777,000 | ||||||||||
Capital Expenditures, Net
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$ | 5.8 | $ | 4.5 | 30.6 | % | ||||||
(A)
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Beginning in the three months ended September 30, 2015, the company changed its definition of a new student as it relates to first-time students who enroll in an online degree program. Under the new definition, the online student must attend classes beyond the first 15 days of the program’s term (or 30 days, if the student was only enrolled in courses that are taught over a 12-week period) in order to be considered an enrolled new student for reporting purposes. Use of the new definition resulted in 488 fewer new students being included in the applicable reporting metrics for the three months ended September 30, 2015 than would have been included using the previous definition. The new student definition impacts the new student enrollment number and the total student enrollment number for periods and dates beginning with the third quarter of 2015, and will impact the persistence rate for dates after September 30, 2015. Prior period information for these metrics has not been modified, since the updated definition of new student was not in effect during those prior periods. The company’s accounting policies for revenue recognition are not based on the definition of a new student and, therefore, the company’s revenue recognition is not impacted by this revised definition.
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(B)
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Persistence rate 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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(C)
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With respect to the private education loans as of September 30, 2015, the amount included $9.0 million classified as current, and $65.9 million classified as non-current. With respect to the private education loans as of September 30, 2014, the amount included $10.3 million classified as current, and $84.3 million classified as non-current.
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(D)
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With respect to the PEAKS Trust Senior Debt as of September 30, 2015, the amount included $20.5 million classified as current, and $27.4 million classified as non-current. With respect to the PEAKS Trust Senior Debt as of September 30, 2014, the amount included $96.5 million classified as current, and $44.0 million classified as non-current.
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(E)
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With respect to the CUSO Secured Borrowing Obligation as of September 30, 2015, the amount included $20.1 million classified as current, and $91.5 million classified as non-current. With respect to the CUSO Secured Borrowing Obligation as of September 30, 2014, the amount included $20.7 million classified as current, and $101.9 classified as non-current.
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·
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$43.9 million in 2015 (of which $38.4 million was paid in the nine months ended September 30, 2015);
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·
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$25.3 million in 2016;
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·
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$13.4 million in 2017; and
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·
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$86.1 million in 2018 and later, which amount includes an approximately $13.2 million payment in 2020 under the PEAKS guarantee.
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ITT EDUCATIONAL SERVICES, INC.
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CONDENSED CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands, except per share data)
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(unaudited)
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As of
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September 30, 2015
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December 31, 2014
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September 30, 2014
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 131,461 | $ | 135,937 | $ | 204,227 | ||||||
Restricted cash
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5,675 | 6,040 | 5,974 | |||||||||
Accounts receivable, net
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42,848 | 46,383 | 68,587 | |||||||||
Private education loans, net
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8,984 | 10,584 | 10,339 | |||||||||
Deferred income taxes
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25,764 | 34,547 | 51,053 | |||||||||
Prepaid expenses and other current assets
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77,571 | 57,923 | 48,478 | |||||||||
Total current assets
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292,303 | 291,414 | 388,658 | |||||||||
Property and equipment, net
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148,606 | 157,072 | 155,459 | |||||||||
Private education loans, excluding current portion, net
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65,938 | 80,292 | 84,272 | |||||||||
Deferred income taxes
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66,758 | 68,041 | 69,685 | |||||||||
Collateral deposits
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97,874 | 97,932 | 8,737 | |||||||||
Other assets
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56,992 | 54,409 | 60,695 | |||||||||
Total assets
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$ | 728,471 | $ | 749,160 | $ | 767,506 | ||||||
Liabilities and Shareholders' Equity
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Current liabilities:
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Current portion of long-term debt
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$ | 89,011 | $ | 9,635 | $ | 50,000 | ||||||
Current portion of PEAKS Trust senior debt
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20,534 | 37,545 | 96,516 | |||||||||
Current portion of CUSO secured borrowing obligation
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20,121 | 20,813 | 20,662 | |||||||||
Accounts payable
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65,829 | 67,848 | 80,479 | |||||||||
Accrued compensation and benefits
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18,704 | 12,264 | 18,157 | |||||||||
Other current liabilities
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58,333 | 27,050 | 27,838 | |||||||||
Deferred revenue
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121,310 | 147,475 | 144,017 | |||||||||
Total current liabilities
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393,842 | 322,630 | 437,669 | |||||||||
Long-term debt, excluding current portion
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0 | 86,714 | 0 | |||||||||
PEAKS Trust senior debt, excluding current portion
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27,422 | 38,658 | 44,000 | |||||||||
CUSO secured borrowing obligation, excluding current portion
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91,450 | 100,194 | 101,880 | |||||||||
Other liabilities
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58,193 | 52,959 | 52,422 | |||||||||
Total liabilities
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570,907 | 601,155 | 635,971 | |||||||||
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, $.01 par value, 300,000,000 shares authorized, 37,068,904 issued
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371 | 371 | 371 | |||||||||
Capital surplus
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179,922 | 198,883 | 196,105 | |||||||||
Retained earnings
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982,709 | 969,670 | 954,753 | |||||||||
Accumulated other comprehensive income
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487 | 1,201 | 2,432 | |||||||||
Treasury stock, 13,394,898, 13,619,010 and 13,619,729 shares at cost
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(1,005,925 | ) | (1,022,120 | ) | (1,022,126 | ) | ||||||
Total shareholders' equity
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157,564 | 148,005 | 131,535 | |||||||||
Total liabilities and shareholders' equity
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$ | 728,471 | $ | 749,160 | $ | 767,506 |
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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Nine Months
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Ended September 30,
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Ended September 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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$ | 203,178 | $ | 242,561 | $ | 647,384 | $ | 718,580 | ||||||||
Costs and expenses:
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Cost of educational services
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93,274 | 117,539 | 298,692 | 353,930 | ||||||||||||
Student services and administrative expenses
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84,622 | 100,440 | 266,282 | 297,225 | ||||||||||||
Goodwill impairment
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5,203 | 0 | 5,203 | 0 | ||||||||||||
Settlements and legal and professional fees related to certain lawsuits, investigations and accounting matters
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6,813 | 11,269 | 20,104 | 25,196 | ||||||||||||
Loss related to loan program guarantees
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0 | 2,019 | 0 | 2,019 | ||||||||||||
Provision for private education loan losses
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754 | 4,511 | 5,311 | 13,582 | ||||||||||||
Total costs and expenses
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190,666 | 235,778 | 595,592 | 691,952 | ||||||||||||
Operating income
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12,512 | 6,783 | 51,792 | 26,628 | ||||||||||||
Gain on consolidation of variable interest entity
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0 | 16,631 | 0 | 16,631 | ||||||||||||
Interest income
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22 | 17 | 57 | 51 | ||||||||||||
Interest (expense)
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(9,709 | ) | (5,831 | ) | (30,088 | ) | (18,995 | ) | ||||||||
Income before provision for income taxes
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2,825 | 17,600 | 21,761 | 24,315 | ||||||||||||
Provision for income taxes
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1,137 | 7,278 | 8,910 | 9,979 | ||||||||||||
Net income
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$ | 1,688 | $ | 10,322 | $ | 12,851 | $ | 14,336 | ||||||||
Earnings per share:
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Basic
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$ | 0.07 | $ | 0.44 | $ | 0.54 | $ | 0.61 | ||||||||
Diluted
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$ | 0.07 | $ | 0.44 | $ | 0.54 | $ | 0.60 | ||||||||
Supplemental Data:
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Cost of educational services
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45.9 | % | 48.5 | % | 46.1 | % | 49.3 | % | ||||||||
Student services and administrative expenses
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41.6 | % | 41.4 | % | 41.1 | % | 41.4 | % | ||||||||
Goodwill impairment
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2.6 | % | 0.0 | % | 0.8 | % | 0.0 | % | ||||||||
Settlements and legal and professional fees related to certain lawsuits, investigations and accounting matters
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3.4 | % | 4.6 | % | 3.1 | % | 3.5 | % | ||||||||
Loss related to loan program guarantees
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0.0 | % | 0.8 | % | 0.0 | % | 0.3 | % | ||||||||
Provision for private education loan losses
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0.4 | % | 1.9 | % | 0.8 | % | 1.9 | % | ||||||||
Operating margin
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6.2 | % | 2.8 | % | 8.0 | % | 3.7 | % | ||||||||
Student enrollment at end of period
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48,231 | 57,101 | 48,231 | 57,101 | ||||||||||||
Campuses at end of period
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140 | 148 | 140 | 148 | ||||||||||||
Shares for earnings per share calculation:
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Basic
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23,692,000 | 23,483,000 | 23,625,000 | 23,463,000 | ||||||||||||
Diluted
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23,937,000 | 23,703,000 | 23,947,000 | 23,777,000 | ||||||||||||
Effective tax rate
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40.2 | % | 41.4 | % | 40.9 | % | 41.0 | % |
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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Nine Months
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Ended September 30,
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Ended September 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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$ | 1,688 | $ | 10,322 | $ | 12,851 | $ | 14,336 | ||||||||
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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4,816 | 5,537 | 16,858 | 18,507 | ||||||||||||
Provision for doubtful accounts
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6,879 | 16,830 | 27,754 | 47,212 | ||||||||||||
Deferred income taxes
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(4,170 | ) | 25,046 | 8,253 | 23,036 | |||||||||||
Stock-based compensation expense
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1,266 | 2,667 | 4,526 | 7,529 | ||||||||||||
Goodwill impairment
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5,203 | 0 | 5,203 | 0 | ||||||||||||
Accretion of discount on private education loans
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(2,818 | ) | (2,727 | ) | (8,847 | ) | (9,099 | ) | ||||||||
Accretion of discount on long-term debt
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386 | 0 | 1,162 | 0 | ||||||||||||
Accretion of discount on PEAKS Trust senior debt
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1,455 | 1,788 | 4,475 | 4,770 | ||||||||||||
Accretion of discount on CUSO secured borrowing obligation
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201 | 0 | 634 | 0 | ||||||||||||
Provision for private education loan losses
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754 | 4,511 | 5,311 | 13,582 | ||||||||||||
(Gain) on consolidation of variable interest entity
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0 | (16,631 | ) | 0 | (16,631 | ) | ||||||||||
Other
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(265 | ) | (250 | ) | (680 | ) | (678 | ) | ||||||||
Changes in operating assets and liabilities, net of acquisition:
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Restricted cash
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1,261 | (468 | ) | 365 | 2,400 | |||||||||||
Accounts receivable
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(4,523 | ) | (16,480 | ) | (24,219 | ) | (15,498 | ) | ||||||||
Private education loans
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6,245 | 4,221 | 19,490 | 12,314 | ||||||||||||
Accounts payable
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(10,446 | ) | 4,561 | (4,056 | ) | 22,458 | ||||||||||
Other operating assets and liabilities
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11,618 | (18,591 | ) | 10,404 | (28,021 | ) | ||||||||||
Deferred revenue
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1,742 | 12,786 | (26,165 | ) | (4,614 | ) | ||||||||||
Net cash flows from operating activities
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21,292 | 33,122 | 53,319 | 91,603 | ||||||||||||
Cash flows from investing activities:
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Capital expenditures, net
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(3,310 | ) | (1,798 | ) | (5,819 | ) | (4,455 | ) | ||||||||
Acquisition of company
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0 | (153 | ) | 0 | (5,186 | ) | ||||||||||
Collateralization of letters of credit
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0 | (109 | ) | 60 | (109 | ) | ||||||||||
Proceeds from repayment of notes
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0 | 100 | 0 | 293 | ||||||||||||
Purchase of investments
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(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
Net cash flows from investing activities
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(3,311 | ) | (1,961 | ) | (5,761 | ) | (9,459 | ) | ||||||||
Cash flows from financing activities:
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Repayment of long-term debt
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(3,500 | ) | 0 | (8,500 | ) | 0 | ||||||||||
Repayment of PEAKS Trust senior debt
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(7,525 | ) | (51,706 | ) | (32,551 | ) | (92,776 | ) | ||||||||
Repayment of CUSO secured borrowing obligation
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0 | 0 | (10,351 | ) | 0 | |||||||||||
Common shares tendered for taxes
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(127 | ) | (184 | ) | (632 | ) | (912 | ) | ||||||||
Net cash flows from financing activities
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(11,152 | ) | (51,890 | ) | (52,034 | ) | (93,688 | ) | ||||||||
Net change in cash and cash equivalents
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6,829 | (20,729 | ) | (4,476 | ) | (11,544 | ) | |||||||||
Cash and cash equivalents at beginning of period
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124,632 | 224,956 | 135,937 | 215,771 | ||||||||||||
Cash and cash equivalents at end of period
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$ | 131,461 | $ | 204,227 | $ | 131,461 | $ | 204,227 |