News Releases

ITT Educational Services, Inc. Reports 2016 Second Quarter Results

Jul 28, 2016

CARMEL, Ind., July 28, 2016 /PRNewswire/ -- ITT Educational Services, Inc. (NYSE:  ESI), a leading provider of technology-oriented postsecondary degree programs, today reported that diluted earnings per share in the first six months of 2016 was $0.35, compared to $0.47 in the first six months of 2015.  New student enrollment in the second quarter of 2016 decreased 21.6% to 9,910 compared to 12,638 in the same period in 2015. Total student enrollment decreased 16.4% to 40,015 as of June 30, 2016 compared to 47,874 as of June 30, 2015.

The company provided the following information for the three and six months ended June 30, 2016 and 2015:

 


Financial and Operating Data for the Three Months Ended June 30th, Unless Otherwise Indicated

(Dollars in millions, except per share and average annual salary data)















Increase/

2016


2015

(Decrease)








Revenue


$176.3


$214.2


(17.7)%

Operating Income


$13.3


$11.6


14.1%

Operating Margin


7.5%


5.4%


210 basis points

Net Income


$4.3


$0.7


502.0%

Earnings Per Share (diluted)


$0.18


$0.03


500.0%

New Student Enrollment  


9,910


12,638


(21.6)%

Continuing Students  


30,105


35,236


(14.6)%

Total Student Enrollment as of June 30th


40,015


47,874


(16.4)%

Persistence Rate as of June 30th (A)


69.5%


68.8%


 70 basis points

Bad Debt Expense as a Percentage of Revenue


4.3%


4.1%


20 basis points

Days Sales Outstanding as of June 30th


 25.4 days


19.2 days


6.2 days

Deferred Revenue as of June 30th


$85.8


$119.6


(28.2)%

Cash and Cash Equivalents as of June 30th


$78.0


$124.6


(37.4)%

Restricted Cash as of June 30th


$5.4


$6.9


(22.0)%

Collateral Deposits as of June 30th  


$91.2


$97.9


(6.8)%

Private Education Loans (current and non-current),

       Less Allowance for Loan Losses,

       as of June 30th (B)


$59.8


$79.1


(24.4)%

PEAKS Trust Senior Debt (current and non-current)
       
as of June 30th ©


$39.3


$63.6


(38.2)%

CUSO Obligation (current and non-current) as of 
        
June 30th (D)


$105.9


$113.0


(6.2)%

Term Loans (current and non-current) as of June 30th (E)


$34.2


$91.2


(62.5)%

Weighted Average Diluted Shares of Common Stock
       Outstanding


24,122,000


24,086,000



Capital Expenditures


$0.3


$1.6


(81.5)%

Graduate Employment Rate as of April 30th


70% (F)


73% (G)


(300) basis points

Average Annual Reported Graduate Salary as of April 30th


$36,400 (H)


$34,500(I)


5.5%

 

Financial and Operating Data for the Six Months Ended June 30th

(Dollars in millions, except per share data)



2016


2015


Increase/
(Decrease)








Revenue


$367.8


$444.2


(17.2)%

Operating Income


$27.5


$39.3


(30.0)%

Operating Margin


7.5%


8.8%


  (130) basis points

Net Income


$8.4


$11.2


(24.6)%

Earnings Per Share (diluted)


$0.35


$0.47


(25.5)%

Bad Debt Expense as a Percentage of Revenue


4.0%


4.7%


(70) basis points

Weighted Average Diluted Shares of Common
     Stock Outstanding


24,181,000


23,953,000



Capital Expenditures


$1.0


$2.5


(59.3)%








(A)     

Represents the number of Continuing Students in the academic term, divided by the Total Student Enrollment in the immediately preceding academic term.

(B)      

With respect to the private education loans as of June 30, 2016, the amount included $7.8 million classified as current, and $52.0 million classified as non-current.  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 PEAKS Trust Senior Debt as of June 30, 2016, the amount included $12.8 million classified as current, and $26.5 million classified as non-current.  With respect to the PEAKS Trust Senior Debt as of June 30, 2015, the amount included $23.1 million classified as current, and $40.5 million classified as non-current.

 (D)    

With respect to the CUSO Secured Borrowing Obligation as of June 30, 2016, the amount included $17.7 million classified as current, and $88.2 million classified as non-current.  With respect to the CUSO Secured Borrowing Obligation as of June 30, 2015, the amount included $19.8 million classified as current, and $93.2 million classified as non-current.

(E)      

With respect to the term loans as of June 30, 2016, the full amount of $34.2 million was classified as current.  With respect to the term loans as of June 30, 2015, the amount included $14.5 million classified as current, and $76.7 million classified as non-current.

(F)    

Represents the percentage of the ITT Technical Institutes' 2015 employable graduates who obtained employment in positions using skills taught in their programs of study as of April 30, 2016.

(G)   

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.

(H)   

Represents the average annual salary reported by the ITT Technical Institutes' 2015 employed graduates as of April 30, 2016.

(I)    

Represents the average annual salary reported by the ITT Technical Institutes' 2014 employed graduates as of April 30, 2015.

       

The company also announced that earlier this month, it implemented certain modifications to its marketing and recruitment strategy that it expects will result in a significant decrease in its advertising expenditures for the six months ending December 31, 2016 compared to the same period in the prior year.  The modifications also included a significant reduction in the number of recruiting representatives employed at local campus locations in favor of greater utilization of the company's centralized recruitment center. 

As a result of the changes to its marketing and recruitment practices, the company now believes that new student enrollment in the second half of 2016 may decline by approximately 45% to 60% compared to the same period in 2015, which would result in a decline in full year 2016 new student enrollment of between approximately 30% and 40% compared to 2015.  However, as a result of these operational changes, and assuming that new student enrollment for the second half of 2016 is in the range of the current expectations and that there are no material changes to student retention rates in the last six months of 2016 compared to the first six months of 2016, the company updated its internal goals for earnings before interest, taxes, depreciation and amortization ("EBITDA") for the year ending December 31, 2016 from the previous range of $55 million to $75 million to a revised range of $110 million to $125 million, which reflects projected net income in the range of $42 million to $48 million

The company believes that these modifications to its marketing and recruitment strategy for the ITT Technical Institutes are appropriate and prudent given the current operating environment and the company's payment obligations under U.S. Department of Education (the "ED") surety requirements, its financing agreement, its private loan program guarantees and other obligations.  The company believes that these changes will lead to a smaller but more efficient postsecondary institution and, importantly, will enhance the company's focus on its students.

The company also reported that on July 20, 2016, it provided $14.6 million to be held in escrow by the ED, which was the first of three installment amounts that it is required to provide to the ED as additional surety, as previously disclosed. 

The projected new student enrollment, EBITDA and EBITDA component amounts, including net income, are subject to various risks and uncertainties, and do not guarantee actual results for the period indicated.  Factors, risks and uncertainties that could cause actual results to differ materially from those projected include those discussed in the documents that the company files with the U.S. Securities and Exchange Commission. The company undertakes no obligation to update or revise any of the projections, whether as a result of new information, future developments or otherwise.

EBITDA is not a measurement under generally accepted accounting principles in the United States ("GAAP") and may not be similar to EBITDA measures of other companies. Non-GAAP financial information should be considered in addition to, but not as a substitute for, information prepared in accordance with GAAP.  The company believes that EBITDA provides useful information to management and investors as an indicator of the company's operating performance. A reconciliation of projected 2016 EBITDA to projected 2016 net income is included on Schedule A attached to this release.

Based on various assumptions, including the historical and projected performance and collection of the student loans held by the PEAKS Trust and the CUSO, the company reported that its current estimate of the payments it may have to make under the PEAKS guarantee and the CUSO risk sharing agreement (the "CUSO RSA"), in the aggregate, are approximately:

  • $26.5 million in 2016 (of which $17.8 million was paid in the six months ended June 30, 2016);
  • $12.2 million in 2017;
  • $13.0 million in 2018; and
  • $109.5 million in 2019 and later, which amount includes an approximately $10.8 million payment in 2020 under the PEAKS guarantee.

These estimated payment amounts are net of estimated aggregate recoveries of approximately $3.9 million under the CUSO RSA, which the company has offset or expects to offset against amounts due by it under the CUSO RSA over these periods.  The company urges readers to review the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which the company plans to file with the U.S. Securities and Exchange Commission on or before August 1, 2016, and which will contain additional information regarding these estimated payment amounts, including the assumptions used, the estimates of the type of payments, regular, discharge or deferred, and estimated recoveries, under the CUSO RSA.         

Except for the historical information contained herein, the matters discussed herein are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are made based on the current expectations and beliefs of the company's management concerning future developments and their potential effect on the company. The company cannot assure you that future developments affecting the company will be those anticipated by its management. These forward-looking statements involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the failure of the company to show cause to ACICS' satisfaction that the Company's institutions' grants of accreditation should not be withdrawn or conditioned; the impact of adverse actions by the ED; the inability of the Company to fund additional amounts require by the ED; the impact if the ED does not renew its recognition of ACICS; the action by the U.S. Securities and Exchange Commission against the company; issues or negative determinations related to the restatement of the company's financial statements; the company's failure to submit its 2013 audited financial statements and 2013 compliance audits with the ED by the due date; the impact of the consolidation of variable interest entities on the company and the regulations, requirements and obligations that it is subject to; the inability to obtain any required amendments or waivers of noncompliance with covenants under the company's financing agreement; the company's inability to remediate material weaknesses, or the discovery of additional material weaknesses, in the company's internal control over financial reporting; the company's exposure under its guarantees related to private student loan programs; the outcome of litigation, investigations and claims against the company; the failure of potential settlements to be approved and finalized on the terms proposed or initially agreed to; the effects of the cross-default provisions in the company's financing agreement; changes in federal and state governmental laws and regulations with respect to education and accreditation standards, or the interpretation or enforcement of those laws and regulations, including, but not limited to, the level of government funding for, and the company's eligibility to participate in, student financial aid programs utilized by the company's students; business conditions in the postsecondary education industry and in the general economy; the company's failure to comply with the extensive education laws and regulations and accreditation standards that it is subject to; effects of any change in ownership of the company resulting in a change in control of the company, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of its campuses; the company's ability to implement its growth strategies; the company's ability to retain or attract qualified employees to execute its business and growth strategies; the company's failure to maintain or renew required federal or state authorizations or accreditations of its campuses or programs of study; receptivity of students and employers to the company's existing program offerings and new curricula; the company's ability to repay moneys it has borrowed; the company's ability to collect internally funded financing from its students; and other risks and uncertainties detailed from time to time in the company's filings with the U.S. Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

 

 


ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

(unaudited)









As of


June 30, 2016


December 31, 2015


June 30, 2015

Assets






Current assets:






     Cash and cash equivalents

$77,999


$130,897


$124,632

     Restricted cash

5,408


6,015


6,936

     Accounts receivable, net

49,242


48,837


45,204

     Private education loans

7,807


8,480


9,379

     Deferred income taxes

22,194


26,440


24,795

     Prepaid expenses and other current assets

21,328


22,429


57,294

          Total current assets

183,978


243,098


268,240







Property and equipment, net

134,402


142,164


150,095

Private education loans, excluding current portion, net

51,960


62,161


69,724

Deferred income taxes

68,496


71,817


67,125

Collateral deposits

91,230


91,168


97,873

Other assets

54,809


53,246


61,030

     Total assets

$584,875


$663,654


$714,087







Liabilities and Shareholders' Equity






Current liabilities:






    Current portion of term loans

$34,231


$68,161


$14,546

    Current portion of PEAKS Trust senior debt

12,812


20,105


23,068

    Current portion of CUSO secured borrowing obligation

17,706


23,591


19,750

    Accounts payable

58,427


59,753


76,476

    Accrued compensation and benefits

13,105


12,425


16,535

    Other current liabilities

33,152


31,973


27,391

    Deferred revenue

85,830


113,739


119,568

          Total current liabilities

255,263


329,747


297,334







Term loans, excluding current portion

0


0


76,688

PEAKS Trust senior debt, excluding current portion

26,482


30,701


40,515

CUSO secured borrowing obligation, excluding current portion

88,229


91,728


93,218

Other liabilities

49,857


50,342


57,170

     Total liabilities

419,831


502,518


564,925

Commitments and contingencies






Shareholders' equity:






     Preferred stock, $.01 par value,






        5,000,000 shares authorized, none issued

0


0


0

    Common stock, $.01 par value, 300,000,000 shares authorized,






         37,068,904 issued

371


371


371

    Capital surplus

169,037


181,160


186,501

    Retained earnings

981,566


987,223


974,900

    Accumulated other comprehensive (loss) income

(2,172)


(1,693)


725

    Treasury stock, 13,080,520, 13,394,834 and 13,490,795 shares at cost

(983,758)


(1,005,925)


(1,013,335)

        Total shareholders' equity

165,044


161,136


149,162

        Total liabilities and shareholders' equity

$584,875


$663,654


$714,087

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(unaudited)











Three Months


Six Months


Ended June 30,


Ended June 30,


2016


2015


2016


2015









Revenue

$176,324


$214,231


$367,823


$444,206









Costs and expenses:








Cost of educational services

88,592


101,865


180,555


205,418

Student services and administrative expenses 

71,705


91,408


149,604


181,660

Asset impairment

317


0


985


0

Legal and professional fees related to certain lawsuits,








    investigations and accounting matters

1,265


6,005


6,136


13,291

Provision for private education loan losses

1,169


3,313


3,047


4,557

Total costs and expenses

163,048


202,591


340,327


404,926









Operating income

13,276


11,640


27,496


39,280

Interest income

64


22


132


35

Interest (expense)

(6,136)


(9,991)


(13,235)


(20,379)

Income before provision for income taxes

7,204


1,671


14,393


18,936

Provision for income taxes

2,894


955


5,976


7,773









Net income

$4,310


$716


$8,417


$11,163









Earnings per share:








     Basic

$0.18


$0.03


$0.35


$0.47

     Diluted

$0.18


$0.03


$0.35


$0.47









Supplemental Data:








Cost of educational services

50.2%


47.5%


49.1%


46.2%

Student services and administrative expenses

40.7%


42.7%


40.7%


40.9%

Asset impairment

0.2%


0.0%


0.3%


0.0%

Legal and professional fees related to certain lawsuits,








investigations and accounting matters

0.7%


2.8%


1.7%


3.0%

Provision for private education loan losses

0.7%


1.5%


0.8%


1.0%

Operating margin

7.5%


5.4%


7.5%


8.8%

Student enrollment at end of period 

40,015


47,874


40,015


47,874

Campuses at end of period

137


141


137


141

Shares for earnings per share calculation:








     Basic

23,928,000


23,621,000


23,835,000


23,591,000

     Diluted

24,122,000


24,086,000


24,181,000


23,953,000

















Effective tax rate

40.2%


57.2%


41.5%


41.0%

 


 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)











Three Months


Six Months


Ended June 30,


Ended June 30,


2016


2015


2016


2015

Cash flows from operating activities:








    Net income

$4,310


$716


$8,417


$11,163

    Adjustments to reconcile net income to net cash flows








        from operating activities:








           Depreciation and amortization

4,397


6,061


8,912


12,042

           Asset impairment

317


0


985


0

           Provision for doubtful accounts

7,529


8,692


14,838


20,875

           Deferred income taxes

803


2,554


3,906


12,423

           Stock-based compensation expense

721


1,364


1,948


3,260

           Accretion of discount on private education loans

(2,525)


(2,948)


(5,249)


(6,029)

           Accretion of discount on term loans

329


385


816


776

           Accretion of discount on PEAKS Trust senior debt

516


1,365


1,236


3,020

           Accretion of discount on CUSO secured borrowing obligation

30


214


75


433

           Provision for private education loan losses

1,169


3,313


3,047


4,557

           Other

(285)


(148)


(522)


(415)

           Changes in operating assets and liabilities:








               Restricted cash

130


(608)


607


(896)

               Accounts receivable

(9,685)


(7,696)


(15,243)


(19,696)

               Private education loans

6,287


6,601


13,075


13,245

               Accounts payable

1,409


848


(1,937)


6,390

               Other operating assets and liabilities

(2,033)


(1,931)


(1,415)


(1,214)

               Deferred revenue

(20,166)


(20,288)


(27,909)


(27,907)

Net cash flows from operating activities

(6,747)


(1,506)


5,587


32,027









Cash flows from investing activities:








     Capital expenditures

(304)


(1,640)


(1,022)


(2,509)

     Collateral and escrowed funds

(1)


59


(62)


59

Net cash flows from investing activities

(305)


(1,581)


(1,084)


(2,450)









Cash flows from financing activities:








     Repayment of term loans

(15,824)


(2,500)


(35,000)


(5,000)

     Repayment of PEAKS Trust senior debt

(5,772)


(9,380)


(12,748)


(25,026)

     Repayment of CUSO secured borrowing obligation

(1,855)


(6,314)


(9,459)


(10,351)

    Common shares tendered for taxes

(161)


(38)


(194)


(505)

Net cash flows from financing activities

(23,612)


(18,232)


(57,401)


(40,882)









Net change in cash and cash equivalents

(30,664)


(21,319)


(52,898)


(11,305)









Cash and cash equivalents at beginning of period

108,663


145,951


130,897


135,937









Cash and cash equivalents at end of period

$77,999


$124,632


$77,999


$124,632

 

Schedule A

EBITDA is not a measurement under GAAP and may not be similar to EBITDA measures of other companies. Non-GAAP financial information should be considered in addition to, but not as a substitute for, information prepared in accordance with GAAP.  The company believes that EBITDA provides useful information to management and investors as an indicator of the company's operating performance. 

Projected EBITDA is only an estimate and contains forward-looking information.  The company has made a number of assumptions in preparing the projection, including assumptions as to the components of the projected EBITDA.  These assumptions may or may not prove to be correct.  In order to provide projections with respect to EBITDA, the company must estimate amounts for the GAAP measures that are components of the reconciliation of projected EBITDA.  By providing these estimates, the company is in no way indicating that it is providing projections on those GAAP components of the reconciliation.

Projected EBITDA can be reconciled to the company's projected net income for the period indicated, as follows:

 



PROJECTED



For the Twelve Months Ending

December 31, 2016



Low End of

Range


High End of

Range



(Dollars in thousands)

Net Income


$42,000


$48,000

Plus: Interest expense, net 


23,000


25,000

         Income taxes


28,000


32,000

         Depreciation and amortization


17,000


20,000

EBITDA


$110,000


$125,000

 

 

SOURCE ITT Educational Services, Inc.

For further information: Nicole Elam, ITT Educational Services, Inc., (317) 706-9200, www.ittesi.com