ITT Educational Services, Inc. Reports 2012 Fourth Quarter and Full-Year Results

   ITT Educational Services, Inc. Reports 2012 Fourth Quarter and Full-Year
                                   Results

PR Newswire

CARMEL, Ind., Jan. 24, 2013

CARMEL, Ind., Jan. 24, 2013 /PRNewswire/ -- ITT Educational Services, Inc.
(NYSE:  ESI), a leading provider of technology-oriented postsecondary degree
programs, today reported that new student enrollment in the fourth quarter of
2012 decreased 11.4% to 13,398 compared to 15,125 in the same period in 2011. 
Total student enrollment decreased 16.6% to 61,059 as of December 31, 2012
compared to 73,255 as of December 31, 2011. 

The company provided the following information for the three and twelve months
ended December 31, 2012 and 2011:

Financial and Operating Data for the Three Months Ended December 31st, Unless
Otherwise Indicated
(Dollars in millions, except per share and per student data)
                                                            Increase/
                                2012        2011            (Decrease)
Revenue                         $300.8      $368.3          (18.3)%
Operating Income/(Loss)         $(16.0)     $126.6          N/M
Operating Margin                (5.3)%      34.4%            (3,970) basis
                                                            points
Net Income/(Loss)               $(9.5)      $76.0           N/M
Earnings/(Loss) Per Share       $(0.41)     $2.87           N/M
(diluted)
New Student Enrollment          13,398      15,125          (11.4)%
Continuing Students             47,661      58,130          (18.0)%
Total Student Enrollment as of  61,059      73,255          (16.6)%
December 31^st
Persistence Rate as of          72.6%       73.4%            (80) basis points
December 31^st  ^(A)
Revenue Per Student             $4,582      $4,649          (1.4)%
Cash and Cash Equivalents,
Restricted Cash and
Investments as of December      $246.9      $379.6          (34.9)%
31^st
Bad Debt Expense as a           6.9%        4.7%            220 basis points
Percentage of Revenue
Days Sales Outstanding as of    23.6 days   12.0 days        11.6 days
December 31^st
Deferred Revenue as of          $135.9      $226.5          (40.0)%
December 31^st
Debt as of December 31^st       $140.0      $150.0          (6.7)%
Weighted Average Diluted
Shares of Common                23,360,000  26,527,000

  Stock Outstanding
Shares of Common Stock          0           570,000    ^(B)
Repurchased
Number of New Colleges in       0           5
Operation
Capital Expenditures, Net       $2.4        $6.8            (65.1)%

 

 

Financial and Operating Data for the Twelve Months Ended December 31st
(Dollars in millions, except per share and per student data)
                          2012                2011              Increase/
                                                                (Decrease)
Revenue                   $1,287.2            $1,500.0          (14.2)%
Operating Income          $232.8              $507.1            (54.1)%
Operating Margin          18.1%               33.8%             (1,570) basis
                                                                points
Net Income                $140.5              $307.8            (54.4)%
Earnings Per Share        $5.85               $11.13            (47.4)%
(diluted)
Bad Debt Expense as a     6.1%                4.1%              200 basis
Percentage of Revenue                                           points
Revenue Per Student       $18,625             $18,370           1.4%
Weighted Average
Diluted Shares of         23,999,000          27,655,000
Common
  Stock Outstanding
Shares of Common Stock    3,025,700    ^(C)   4,040,000   ^(D)
Repurchased
Number of New Colleges    6                   11
in Operation
Capital Expenditures,     $17.2               $26.9             (35.9)%
Net
N/M means not meaningful.

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

^(B) For approximately $34.6 million or at an average price of $60.71 per
share.

^(C) For approximately $207.9 million or at an average price of $68.72 per
share.

^(D) For approximately $282.7 million or at an average price of $69.98 per
share.

The attached Schedule A summarizes the company's:

  o charges related to private student loan programs in the three months ended
    December 31, 2012;
  o contingency reserve roll-forward in the three months ended December 31,
    2012; and
  o internal goals for the twelve months ending December 31, 2013.

ITT Educational Services, Inc. will conduct a conference call with financial
analysts to discuss its 2012 fourth quarter earnings at 11:00 am (ET) this
morning.  The public is invited to listen to a live webcast of the conference
call.  The webcast may be accessed by following the "Live Webcast" directions
on ITT/ESI's website at www.ittesi.com.

Except for the historical information contained herein, the matters discussed
in this press release, including in the attached Schedule A, 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: 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 and growth 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 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; loss of access by the
company's students to lenders for education loans; the company's ability to
collect internally funded financing from its students; the company's exposure
under its guarantees related to private student loan programs; the company's
ability to successfully defend litigation and other claims brought against it;
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)
                                         As of
                                         December 31, 2012  December 31, 2011
                                         (unaudited)
Assets
Current assets:
     Cash and cash equivalents           $246,342           $228,993
     Short-term investments              0                  148,488
     Restricted cash                     601                2,128
     Accounts receivable, net            77,313             48,106
     Deferred income taxes               44,547             9,759
     Prepaid expenses and other current  16,162             18,814
assets
          Total current assets           384,965            456,288
Property and equipment, net              189,890            201,257
Deferred income taxes                    56,112             33,267
Other assets                             41,263             38,006
     Total assets                        $672,230           $728,818
Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                    63,304             78,876
     Accrued compensation and benefits   21,023             21,438
     Other current liabilities           86,722             18,190
     Deferred revenue                    135,900            226,543
          Total current liabilities      306,949            345,047
Long-term debt                           140,000            150,000
Other liabilities                        98,327             64,972
     Total liabilities                   545,276            560,019
Shareholders' equity:
     Preferred stock, $.01 par value,
        5,000,000 shares authorized,     0                  0
none issued
    Common stock, $.01 par value,
300,000,000 shares authorized,
         37,068,904 issued               371                371
    Capital surplus                      206,703            189,573
    Retained earnings                    959,072            827,675
    Accumulated other comprehensive      (7,930)            (9,479)
(loss)
    Treasury stock, 13,744,395 and       (1,031,262)        (839,341)
10,969,425 shares, at cost
        Total shareholders' equity       126,954            168,799
        Total liabilities and            $672,230           $728,818
shareholders' equity

 

 

 

ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
                        Three Months                 Twelve Months
                        Ended December 31,           Ended December 31,
                        (unaudited)                  (unaudited)
                        2012           2011          2012          2011
Revenue                 $300,843       $368,263      $1,287,209    $1,499,949
Costs and expenses:
Cost of educational     129,394        131,605       539,223       553,065
services
Student services and
administrative          94,566         110,087       422,345       439,808
expenses 
Settlement cost *       21,750         0             21,750        0
Loss related to private
student loan programs   71,102         0             71,102        0
**
Total costs and         316,812        241,692       1,054,420     992,873
expenses
Operating income (loss) (15,969)       126,571       232,789       507,076
Interest income         40             561           1,348         2,902
Interest (expense)      (901)          (383)         (3,723)       (1,825)
Income (loss) before
provision for income    (16,830)       126,749       230,414       508,153
taxes
Provision for income    (7,362)        50,701        89,949        200,401
taxes
Net income (loss)       $(9,468)       $76,048       $140,465      $307,752
Earnings (loss) per
share:
     Basic              $(0.41)        $2.89         $5.88         $11.22
     Diluted            $(0.41)        $2.87         $5.85         $11.13
Supplemental Data:
Cost of educational     43.0%          35.7%         41.9%         36.9%
services
Student services and    31.4%          29.9%         32.8%         29.3%
administrative expenses
Settlement cost         7.2%           0.0%          1.7%          0.0%
Loss related to private 23.6%          0.0%          5.5%          0.0%
student loan programs
Operating margin        (5.3%)         34.4%         18.1%         33.8%
Student enrollment at   61,059         73,255        61,059        73,255
end of period 
Campuses at end of      147            141           147           141
period
Shares for earnings per
share calculation:
     Basic              23,360,000     26,354,000    23,880,000    27,429,000
     Diluted            23,360,000     26,527,000    23,999,000    27,655,000
Effective tax rate      43.7%          40.0%         39.0%         39.4%
* See Schedule A attached hereto for additional information relating to the
settlement cost.

** See Schedule A attached hereto for additional information relating to the
loss related to private student loan programs.

 

 

ITT EDUCATIONAL SERVICES, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
                                      Three Months        Twelve Months
                                      Ended December 31,  Ended December 31,
                                      (unaudited)         (unaudited)
                                      2012      2011      2012       2011
Cash flows from operating activities:
    Net income (loss)                 $(9,468)  $76,048   $140,465   $307,752
    Adjustments to reconcile net
income to net cash flows
        from operating activities:
           Depreciation and           7,305     7,518     29,350     27,886
amortization
           Provision for doubtful     20,827    17,290    78,307     61,308
accounts
           Deferred income taxes      (42,543)  4,017     (58,640)   (8,991)
           Excess tax benefit from    0         (21)      (1,382)    (1,166)
stock option exercises
           Stock-based compensation   3,612     4,236     16,658     17,074
expense
           Settlement cost            21,750    0         21,750     0
           Asset impairment           15,166    0         15,166     0
           Other                      6,895     1,301     6,992      (1,936)
           Changes in operating
assets and liabilities:
               Restricted cash        119       (1,715)   1,527      (1,873)
               Accounts receivable    (8,715)   (9,256)   (107,514)  (40,477)
               Accounts payable       (13,054)  (9,949)   (15,572)   10,956
               Other operating assets 67,882    6,047     68,890     35,118
and liabilities
               Deferred revenue       16,811    497       (90,643)   (17,819)
Net cash flows from operating         86,587    96,013    105,354    387,832
activities
Cash flows from investing activities:
     Facility expenditures and land   (553)     (924)     (1,046)    (4,053)
purchases
     Capital expenditures, net        (2,384)   (6,834)   (17,204)   (26,847)
     Proceeds from sales and
maturities of investments and         577       24,323    217,301    337,032
repayment of notes
     Purchase of investments and note (12,342)  (21,889)  (75,887)   (352,195)
advances
Net cash flows from investing         (14,702)  (5,324)   123,164    (46,063)
activities
Cash flows from financing activities:
     Excess tax benefit from stock    0         21        1,382      1,166
option exercises
     Proceeds from exercise of stock  0         313       8,345      5,599
options
     Debt issue costs                 0         0         (1,525)    0
     Proceeds from revolving          0         0         175,000    0
borrowings
     Repayments of revolving          0         0         (185,000)  0
borrowings
     Repurchase of common stock and   (1)       (34,607)  (209,371)  (283,320)
shares tendered for taxes
Net cash flows from financing         (1)       (34,273)  (211,169)  (276,555)
activities
Net change in cash and cash           71,884    56,416    17,349     65,214
equivalents
Cash and cash equivalents at          174,458   172,577   228,993    163,779
beginning of period
Cash and cash equivalents at end of   $246,342  $228,993  $246,342   $228,993
period

 

 

Schedule A
(Dollars in millions, except per share data)
 The following table sets forth the charges recorded by the company in the
three months ended December 31, 2012, related to the 2009 RSA^(a), the PEAKS
Program^(b) and the 2007 RSA^(c).  The charges included: additional reserves
recorded for the 2009 RSA and PEAKS Guarantee; an accrual for the settlement
related to the 2007 RSA; and the impairment of certain assets related to the
2009 RSA and PEAKS Program.
                       Charges Related to the Private Student Loan Programs
                       in the Three Months Ended December 31, 2012
                       Revenue           Operating                Total

                       Offset           Expense                   Charges
Reserve for 2009 RSA   $10.2            $55.9                     $66.1
and PEAKS Guarantee
2007 RSA Settlement                     21.8                      21.8
Accrual
2009 RSA- and PEAKS
Program-Related                         15.2                      15.2

   Asset Impairment
     Totals            $10.2            $92.9                     $103.1

 

The following table sets forth the roll-forward of the company's contingency
reserves in the three months ended December 31, 2012, which primarily related
to the 2009 RSA, the PEAKS Guarantee and the 2007 RSA.  The changes to the
company's contingency reserves included: additional reserves recorded for the
2009 RSA and PEAKS Guarantee; an accrual for the 2007 RSA settlement;
guarantee and other payments made (net of recoveries) related to the 2009 RSA
and PEAKS Program; and estimated recoverable amounts under the PEAKS
Guarantee.
                Contingency Reserve Roll-forward in the Three Months Ended
                December 31, 2012
                2007 RSA          All Other               Total
Balance at
September 30,   $24.2             $20.1                   $44.3
2012
Additional      21.8              66.1                    87.9
Reserves
Payments, net   0.0               (15.1)                  (15.1)
Estimated       0.0               6.7                     6.7
Recovery
Balance at
December 31,    $46.0             $77.8                   $123.8
2012

The following table sets forth the range of the company's internal goals with
respect to certain cash flow items and available borrowings in the twelve
months ending December 31, 2013.
                      Internal Goals for the Twelve Months Ending December 31,
                      2013
                      Low End of Range              High End of Range
Cash and Available
Borrowings at January                 $430                        $430
1, 2013
Cash Flows from
Operations before
2007 RSA

   Settlement and     141                           151
2009 RSA and PEAKS

   Program Payments
(CFOBRSA) ^ (d)
2007 RSA Settlement   (46)                          (46)
Payment (actual)
Payments Related to
the 2009 RSA and
PEAKS                 (20)                          (15)

   Program
Cash Flows from                       75                          90
Operations
Capital Expenditures                  (25)                        (15)
Cash and Available
Borrowings at                         $480                        $505
December 31, 2013

 

The following table sets forth the range of the company's internal goals for
the twelve months ending December 31, 2013 with respect to: the percentage
increase/(decrease) in New Student Enrollment in 2013 compared to 2012; the
percentage increase/(decrease) in Revenue per Student in 2013 compared to
2012; Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA")^(e); and Earnings per Share (diluted).
                    Internal Goals for the Twelve Months
                    Ending December 31, 2013
                    Low End of                    High End of

                    Range                         Range
New Student
Enrollment in 2013  (5.0)%                        5.0%
compared to 2012
Revenue per Student
in 2013 compared to (6.0)%                        (4.0)%
2012
Earnings Before
Interest, Taxes,
Depreciation and    $165                          $190

    Amortization
(EBITDA)
Earnings per Share  $3.50                         $4.00
(diluted)
(a) On February 20, 2009, the company entered into agreements with an
unaffiliated entity (the "2009 Entity") to create a program that made private
education loans available to its students (the "2009 Loan Program"). Under the
2009 Loan Program, an unaffiliated lender originated private education loans
to the company's eligible students and, subsequently, sold those loans to the
2009 Entity. No new private education loans were or will be originated under
the 2009 Loan Program after December 31, 2011, but immaterial amounts related
to loans originated prior to that date were disbursed by the lender through
June 2012.
In connection with the 2009 Loan Program, the company entered into a risk
sharing agreement (the "2009 RSA") with the 2009 Entity. Under the 2009 RSA,
the company guarantees the repayment of any private education loans that are
charged off above a certain percentage of the private education loans made
under the 2009 Loan Program, based on the annual dollar volume. During the
three months ended December 31, 2012, the company made guarantee payments, net
of recoveries, related to the 2009 RSA in the amount of approximately $0.6.
In addition, the company has made advances to the 2009 Entity under a
revolving promissory note (the "Revolving Note").  The Revolving Note bears
interest, is subject to customary terms and conditions and may be repaid at
any time without penalty prior to its 2026 maturity date.  The company has no
immediate plans to significantly increase the amount of advances that it makes
to the 2009 Entity under the Revolving Note, but the company may decide to do
so in the foreseeable future.  The face value of the Revolving Note as of
December 31, 2012 was approximately $8.2.  The carrying value of the
Subordinated Note (defined below in footnote (b)) and Revolving Note as of
December 31, 2012 was approximately $2.9 and is included in Other assets on
the company's Consolidated Balance Sheet.  For additional information about
the 2009 RSA, see the company's Form 10-Q filed with the Securities and
Exchange Commission ("SEC") on October 29, 2012.
(b) On January 20, 2010, the company entered into agreements with unrelated
third parties to establish the PEAKS Private Student Loan Program ("PEAKS
Program"). Under the PEAKS Program, an unaffiliated lender originated private
education loans to the company's eligible students and, subsequently, sold
those loans to an unaffiliated trust ("PEAKS Trust").
The PEAKS Trust issued senior debt in the aggregate principal amount of $300
("PEAKS Senior Debt") to investors. The lender disbursed the proceeds of the
private education loans to the company for application to the students'
account balances, and the company transferred a portion of each disbursement
to the PEAKS Trust in exchange for a subordinated note issued by the PEAKS
Trust ("Subordinated Note"). No new private education loans were or will be
originated under the PEAKS Program after July 2011, but immaterial amounts
related to loans originated prior to that date were disbursed by the lender
through March 2012.
The Subordinated Note is non-interest bearing and has been recorded net of an
unamortized discount based on an imputed interest rate of 9.0% in Other assets
on the company's Consolidated Balance Sheets. The maturity date of the
Subordinated Note is in March 2026. The face value of the Subordinated Note as
of December 31, 2012 was approximately $73.2.
The PEAKS Trust utilized the proceeds from the issuance of the PEAKS Senior
Debt and the Subordinated Note to purchase the private education loans made by
the lender to the company's students. The assets of the PEAKS Trust (which
include, among other assets, the private education loans owned by the PEAKS
Trust) serve as collateral for, and are intended to be the principal source
of, the repayment of the PEAKS Senior Debt and the Subordinated Note.  The
PEAKS Trust is required to maintain assets having an aggregate value that
exceeds the outstanding balance of the PEAKS Senior Debt.
The company guarantees payment of the principal, interest and certain call
premiums owed on the PEAKS Senior Debt, the administrative fees and expenses
of the PEAKS Trust and the required ratio of assets of the PEAKS Trust to
outstanding PEAKS Senior Debt ("PEAKS Guarantee"). During the three months
ended December 31, 2012, the company made guarantee and other payments related
to the PEAKS Program to the PEAKS Trust in the amount of approximately $14.6,
primarily related to maintaining the required ratio of assets of the PEAKS
Trust to outstanding PEAKS Senior Debt.
The carrying value of the Subordinated Note and Revolving Note as of December
31, 2012 was approximately $2.9 and is included in Other assets on the
company's Consolidated Balance Sheet.  For additional information about the
PEAKS Program, see the company's Form 10-Q filed with the SEC on October 29,
2012.
(c)  In 2007, the company entered into a Risk Sharing Loan Program Agreement
with Sallie Mae, Inc. ("SMI"), dated July 17, 2007, for certain private
education loans that were made to the company's students in 2007 and early
2008 (the "2007 RSA"). The company guaranteed the repayment of any private
education loans that SMI charged off above a certain percentage of the total
dollar volume of private education loans made under the 2007 RSA.
On December 28, 2012, the company entered into a Settlement Agreement and
Release (the "Settlement Agreement") with SMI to settle the previously
disclosed litigation matter between SMI and the company relating to the 2007
RSA. Under the terms of the Settlement Agreement, the company agreed to pay a
one-time payment of $46 to SMI on or before January 29, 2013. SMI and the
company each also agreed to release the other (and their respective
affiliates) from any and all current and future claims arising out of, or
directly or indirectly related to, the 2007 RSA, other than claims related to
certain provisions of the 2007 RSA governing cooperation, confidentiality, the
treatment of intellectual property and certain indemnification claims related
to the FTC Holder Rule.  SMI specifically agreed to release the company from
any and all of its guarantee obligations arising under the 2007 RSA, and the
company agreed to release all right, title and interest in and to the loans
made pursuant to the 2007 RSA, including any right to receive any payments
related to any of those loans.  For additional information about the 2007 RSA
and the Settlement Agreement, see the company's Form 10-Q filed with the SEC
on October 29, 2012 and the company's Form 8-K filed with the SEC on January
4, 2013.
(d)  Projected CFOBRSA is an estimate of the company's cash flows from
operations before: (i) the company's payment under the Settlement Agreement
discussed above in footnote (c); (ii) any payments by the company related to
its guarantee obligations associated with the 2009 RSA discussed above in
footnote (a); and (iii) any payments by the company related to the PEAKS
Program discussed above in footnote (b).  CFOBRSA is not a measurement under
Generally Accepted Accounting Principles ("GAAP") in the United States and may
not be similar to CFOBRSA 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
CFOBRSA provides useful information to management and investors as an
indicator of the company's operating cash flows before certain items.
Projected CFOBRSA 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
CFOBRSA. These assumptions may or may not prove to be correct. In order to
provide projections with respect to CFOBRSA, the company must estimate amounts
for the GAAP measures that are components of the reconciliation of projected
CFOBRSA.
Projected CFOBRSA can be reconciled to the company's projected cash flows from
operations for the period indicated, as follows:

                                     PROJECTED
                                     For the Twelve Months Ending December 31,
                                     2013
                                     Low End of              High End of

                                     Range                    Range
Cash Flows from Operations           $75                     $90
Plus:  2007 RSA Settlement Payment   46                      46
          Payments Related to the
2009                                 20                      15

             RSA and PEAKS Program
CFOBRSA                              $141                    $151

 

(e)  Projected EBITDA is an estimate of the company's net income plus
interest, taxes, depreciation and amortization for the twelve months ended
December 31, 2013.  EBITDA is not a measurement under GAAP in the United
States 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,
                                     2013
                                     Low End of              High End of

                                     Range                   Range
Net Income                           $83                     $96
Plus:  Interest expense              2                       3
          Income taxes               52                      62
          Depreciation and           28                      29
amortization
EBITDA                               $165                    $190

 

SOURCE ITT Educational Services, Inc.

Website: http://www.ittesi.com
Contact: Lauren Littlefield, Director of Communications, +1-317-706-9200