EX-99 2 exhibit99_1.htm

Exhibit 99.1

 

ITT EDUCATIONAL SERVICES, INC. REPORTS 2006 SECOND QUARTER RESULTS,

NEW STUDENT ENROLLMENT INCREASED 10.4 PERCENT

 

CARMEL, IN, July 27, 2006—ITT Educational Services, Inc. (NYSE: ESI), a leading for-profit provider of postsecondary degree programs, today reported that new student enrollment in the second quarter of 2006 increased 10.4 percent to 11,674 compared to 10,576 in the same period of 2005. Total student enrollment increased 6.3 percent to 44,025 as of June 30, 2006, compared to 41,419 as of June 30, 2005. The enrollment numbers and percentages referenced above in this paragraph exclude international enrollments. Earnings per share (“EPS”) in the second quarter of 2006 increased 14.6 percent to $0.55 compared to $0.48 in the second quarter of 2005.

 

The company provided the following information for the three and six months ended June 30, 2006 and 2005:



Financial and Operating Results For The Three Months Ended June 30th, Unless Otherwise Indicated

(Dollars in millions, except per share and per student data)

 

 

 

2006

 

 

2005

 

Increase/
(Decrease)

 

 

 

 

 

 

 

Revenue

 

$185.6

 

$168.8

 

9.9%

Operating Income

 

$36.6

 

$34.8

 

5.1%

Operating Margin

 

19.7%

 

20.6%

 

(90) basis points

Net Income

 

$24.1

 

$22.4

 

7.6%

Earnings Per Share (diluted)

 

$0.55

 

$0.48

 

14.6%

New Student Enrollment (A)

 

11,674

 

10,576

 

10.4%

Continuing Students (A)

 

32,351

 

30,843

 

4.9%

Total Student Enrollment as of June 30th (A)

 

44,025

 

41,419

 

6.3%

Quarterly Persistence (Retention) Rate (B)

 

73.7%

 

74.2%

 

(50) basis points

Revenue Per Student (A)

 

$4,230

 

$4,061

 

4.2 %

Cash and Cash Equivalents, Restricted Cash and

Investments as of June 30th

 

 

$214.5

 

 

$353.1

 

 

(39.2)%

Bad Debt Expense as a Percentage of Revenue

 

1.5%

 

1.8%

 

(30) basis points

Days Sales Outstanding as of June 30th

 

4.8 days

 

7.4 days

 

(2.6) days

Deferred Tuition Revenue as of June 30th

 

$174.1

 

$140.3

 

24.0%

Debt

 

$ --

 

$ --

 

--

Diluted Shares of Common Stock Outstanding

 

44,042,000

 

47,134,000

 

--

Shares of Common Stock Repurchased

 

1,660,500 (C)

 

--

 

--

Land and Building Purchases

 

$5.9 (D)

 

$10.2 (E)

 

(42.7)%

Number of New Colleges in Operation

 

3

 

2

 

1

Number of New Learning Sites in Operation

 

1

 

1

 

--

Capital Expenditures, Net

 

$9.5

 

$6.9

 

38.2%

 

-5-

 


 

 

 

Financial and Operating Results For The Six Months Ended June 30th

(Dollars in millions, except per share and per student data)

 

 

 

2006

 

 

2005

 

Increase/
(Decrease)

 

 

 

 

 

 

 

Revenue

 

$361.9

 

$328.9

 

10.0%

 

 

 

 

 

 

 

Special Legal and Other Investigation Costs

 

$ (0.4)

 

$7.7

 

(105.6)%

Operating Income

 

$66.8

 

$57.9

 

15.3%

Operating Income Before Special Legal and Other

Investigation Costs (F)

 

 

$66.4

 

 

$65.7

 

 

1.1%

 

 

 

 

 

 

 

Special Legal and Other Investigation Costs as a

Percentage of Revenue

 

 

(0.1)%

 

 

2.3%

 

 

(240) basis points

Operating Margin

 

18.5%

 

17.6%

 

90 basis points

Operating Margin Before Special Legal and Other

Investigation Costs (F)

 

 

18.4%

 

 

19.9%

 

 

(150) basis points

 

 

 

 

 

 

 

Special Legal and Other Investigation Costs, Net of Tax

 

$ (0.3)

 

$4.7

 

(105.6)%

Net Income

 

$44.6

 

$37.4

 

19.1%

Net Income Before Special Legal and Other

Investigation Costs, Net of Tax (F)

 

 

$44.3

 

 

$42.1

 

 

5.2%

 

 

 

 

 

 

 

Special Legal and Other Investigation Costs Per

Share (diluted), Net of Tax

 

 

$ --

 

 

$0.10

 

 

(100.0)%

Earnings Per Share (diluted)

 

$0.99

 

$0.79

 

25.3%

Earnings Per Share (diluted) Before Special

Legal and Other Investigation Costs, Net of Tax (F)

 

 

$0.99

 

 

$0.89

 

 

11.2%

 

 

 

 

 

 

 

Revenue Per Student (A)

 

$8,332

 

$7,979

 

4.4%

Diluted Shares of Common Stock Outstanding

 

44,920,000

 

47,107,000

 

--

Shares of Common Stock Repurchased

 

3,886,200 (G)

 

--

 

--

Land and Building Purchases

 

$10.8 (H)

 

$19.8 (I)

 

(45.4)%

Number of New Colleges in Operation

 

3

 

2

 

1

Number of New Learning Sites in Operation

 

3

 

2

 

1


Capital Expenditures, Net

 

$13.1

 

$10.0

 

30.8%

 

___________________

(A)

Excludes international enrollments.

(B)

Represents the number of Continuing Students in the quarter, divided by the Total Student Enrollment as of the end of the immediately preceding quarter.

(C)

For approximately $106.5 million or at an average price of $64.14 per share.

(D)

Represents costs associated with purchasing, renovating, expanding or constructing buildings at 12 of the company’s locations.

(E)

Represents costs associated with purchasing, renovating, expanding or constructing buildings at nine of the company’s locations.

(F)

Given the large amount of legal and other investigation costs accrued in connection with the U.S. Department of Justice (“DOJ”) investigation of the company, the U.S. Securities and Exchange Commission’s (“SEC”) inquiry into the matters being investigated by the DOJ, and the securities class action, shareholder derivative and books and records inspection lawsuits filed against the company, as described in the company’s 2005 second quarter report on Form 10-Q which was filed with the SEC on July 29, 2005 (collectively, the “Actions”), the company’s management believes that the company’s performance results without these

 

-6-

 


 

additional costs is a useful measure for management and might be a useful supplement for investors in comparing the company’s performance absent the legal and other investigation costs associated with the Actions. Although legal and other investigation costs are a regular expense of the company, the level of legal and other investigation costs incurred by the company as a result of the Actions is much larger than the company has previously experienced, and the company hopes that legal and other investigation costs at this level will not occur in the future. In evaluating the company's performance, the company’s management uses the following measurements that are not under generally accepted accounting principles (“GAAP”) and are, therefore, non-GAAP financial measures. Although the non-GAAP financial measures exclude cash cost to the company, management compensates for this by also using the GAAP measures. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the measures prepared in accordance with GAAP.

(1)

The company believes that Operating Income Before Special Legal and Other Investigation Costs provides useful information to management and investors by improving their ability to compare the company’s Operating Income without the Special Legal and Other Investigation Costs for the six months ended June 30, 2006 with the Operating Income without the Special Legal and Other Investigation Costs for the six months ended June 30, 2005. Operating Income Before Special Legal and Other Investigation Costs can be reconciled to Operating Income as shown in the two lines of the table immediately preceding this entry.

(2)

The company believes that Operating Margin Before Special Legal and Other Investigation Costs provides useful information to management and investors by improving their ability to compare the company’s Operating Income without the Special Legal and Other Investigation Costs as a percentage of Revenue for the six months ended June 30, 2006 with the Operating Income without the Special Legal and Other Investigation Costs as a percentage of Revenue for the six months ended June 30, 2005. Operating Margin Before Special Legal and Other Investigation Costs can be reconciled to Operating Margin as shown in the two lines of the table immediately preceding this entry.

(3)

The company believes that Net Income Before Special Legal and Other Investigation Costs, Net of Tax provides useful information to management and investors by improving their ability to compare the company’s Net Income without the Special Legal and Other Investigation Costs, Net of Tax for the six months ended June 30, 2006 with the Net Income without the Special Legal and Other Investigation Costs, Net of Tax for the six months ended June 30, 2005. For the purpose of calculating this measure, the company used marginal tax rates of 38.5% for 2006 and 38.5% for 2005. Net Income Before Special Legal and Other Investigation Costs, Net of Tax can be reconciled to Net Income as shown in the two lines of the table immediately preceding this entry.

(4)

The company believes that Earnings Per Share (diluted) Before Special Legal and Other Investigation Costs Per Share (diluted), Net of Tax provides useful information to management and investors by improving their ability to compare the company’s Earnings Per Share (diluted) without the Special Legal and Other Investigation Costs Per Share (diluted), Net of Tax for the six months ended June 30, 2006 with the Earnings Per Share (diluted) without the Special Legal and Other Investigation Costs Per Share (diluted), Net of Tax for the six months ended June 30, 2005. Earnings Per Share (diluted) Before Special Legal and Other Investigation Costs Per Share (diluted), Net of Tax can be reconciled to Earnings Per Share (diluted) as shown in the two lines of the table immediately preceding this entry.

 

 

-7-

 


 

 

(G)

For approximately $246.6 million or at an average price of $63.46 per share.

(H)

Represents costs associated with purchasing, renovating, expanding or constructing buildings at 12 of the company’s locations.

(I)

Represents costs associated with purchasing, renovating, expanding or constructing buildings at 10 of the company’s locations.

 

Rene R. Champagne, Chairman and CEO of ITT/ESI, said, “We are very pleased with our performance in the second quarter of 2006. Our growth initiatives helped us to deliver strong financial and operational results. We are optimistic that we can continue delivering solid results in the remainder of 2006, based on the strong interest that continued to be expressed in our programs of study as we began the third quarter of 2006.”

 

Champagne said, “I am also pleased to announce that Kevin M. Modany, President and Chief Operating Officer of ITT/ESI, was elected on July 25, 2006 to serve as a director on ITT/ESI’s Board of Directors.”

 

Kevin M. Modany said, “Our marketing efforts generated a significant increase in leads in the second quarter compared to the same period last year. The increase in leads was supported by a 19 percent increase in advertising expenditures in the three months ended June 30, 2006 compared to the same period in 2005. The increase in advertising expenditures was primarily due to incremental advertising associated with operating new colleges and the introduction of new programs of study.”

 

Modany continued, “During the second quarter of 2006, we began operations at our: 85th college in Dunmore (Scranton), PA; 86th college in Charlotte, NC; and 87th college in Maumee (Toledo), OH. Our new college in Charlotte increases to 33 the number of states in which we have colleges. All three new colleges have begun recruiting and expect to commence classes in September 2006. In the six months ended June 30, 2006, we began operations or started classes at six new colleges.”

 

Modany further noted, “We also began operations at our 7th learning site in Dearborn, MI. This learning site belongs to the ITT Technical Institute in Canton, MI. During the first half of 2006, we added three new learning sites to existing institutes and we plan to add two more learning sites in the second half of 2006.”

 

Modany said, “As part of our continuing efforts to diversify our curriculum offerings, we are pleased to announce a new Associate Degree program in Health Information Technology. We are pursuing the required authorizations to begin offering this program at five of our colleges in the second half of 2006 and at additional colleges throughout 2007 and beyond. The Health Information Technology program also marks the introduction of our new School of Health Sciences, which is our sixth school of study. We plan to develop additional programs of study at the bachelor and associate degree levels that will be offered through our School of Health Sciences and taught both in residence and online. We also plan to begin offering three new concentrations of our bachelor degree program in Business Administration. The new concentrations are in marketing, human resources and finance, and will be taught online.”

 

Modany continued, “We are also awaiting the remaining authorization to begin recruiting students at three colleges for a new bachelor degree program in Construction Management. This

 

-8-

 


 

program will be offered at additional colleges in future quarters, subject to obtaining the required authorizations.”

 

Modany said, “As of June 30, 2006, 15 percent of our students were enrolled in non-technology programs of study compared to 9 percent as of June 30, 2005. Approximately 27 percent of our students were enrolled in bachelor degree programs of study as of June 30, 2006 compared to 22 percent at the same point in 2005.”

 

Modany concluded, “The second quarter 2006 student persistence rate was 73.7 percent compared to 74.2 percent in the same period in 2005. Despite the decline, we are pleased with the student persistence rate in the quarter, considering that the prior quarter declines in the student persistence rate had been much more significant since we began expanding our use of the hybrid delivery model. We hope that the student persistence rate in the second quarter of 2006 marks the beginning of an improving trend and indicates that our various student retention initiatives are working.”

 

Daniel M. Fitzpatrick, Senior Vice President and CFO of ITT/ESI, said, “We are pleased with our financial results for the three months ended June 30, 2006, which were in line with our internal expectations. We continue to generate strong returns on our investments in our various growth initiatives and believe that we are on track to achieve our internal financial goals for 2006.”

 

Fitzpatrick continued, “Operating margin in the second quarter of 2006 decreased 90 basis points to 19.7 percent compared to 20.6 percent in the second quarter of 2005, primarily due to the acceleration of our geographic expansion efforts. During the second quarter of 2006, there were 12 more colleges and learning sites within their first 24 months of operation than in the second quarter of 2005.”

 

Fitzpatrick added, “In the three months ended June 30, 2006, we repurchased 1.7 million shares of our common stock at an average purchase price of $64.14 per share or $106.5 million in total. We intend to continue repurchasing our shares throughout the remainder of 2006.”

 

Fitzpatrick said, “Bad debt expense as a percentage of revenue declined to 1.5 percent in the three months ended June 30, 2006 compared to 1.8 percent in the same period in 2005. Days sales outstanding as of June 30, 2006 were 4.8 days, a 2.6 day decrease, compared to 7.4 days at the same point in 2005.”

 

Fitzpatrick closed by noting, “The fundamentals of the company remain strong, and our internal goal for 2006 EPS remains in the range of $2.66 to $2.69.”

 

Except for the historical information contained herein, the matters discussed in this press release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are made based upon 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: business conditions and growth in the postsecondary education industry and in the general economy; changes in federal and state governmental regulations with respect to education and

 

-9-

 


 

accreditation standards, or the interpretation or enforcement thereof, 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; 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 institutes; the company's ability to implement its growth strategies; the company’s failure to maintain or renew required regulatory authorizations or accreditation of its institutes; 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 student loans; 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 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.

 

FOR FURTHER INFORMATION:

COMPANY:

WEB SITE:

 

Nancy Brown

www.ittesi.com

Director Corporate Relations

 

(317) 706-9260 

 

-10-

 


 

 

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

 

As of

 

June 30, 2006

 

December 31, 2005

 

June 30, 2005

 

(unaudited)

 

 

 

(unaudited)

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

$8,073

 

$13,735

 

$37,283

Short-term investments

205,954

 

388,152

 

312,734

Accounts receivable, net

9,736

 

13,989

 

13,722

Deferred and prepaid income tax

4,950

 

7,030

 

6,746

Prepaids and other current assets

10,427

 

14,102

 

14,966

Total current assets

239,140

 

437,008

 

385,451

 

 

 

 

 

 

Property and equipment, net

141,314

 

127,406

 

119,829

Direct marketing costs, net

19,592

 

17,490

 

16,497

Investments

--

 

9,538

 

3,055

Restricted cash

500

 

500

 

--

Other assets

18,921

 

549

 

561

Total assets

$419,467

 

$592,491

 

$525,393

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

$59,910

 

$56,101

 

$39,688

Accrued compensation and benefits

10,028

 

10,344

 

12,534

Accrued taxes

5,978

 

3,998

 

7,937

Other accrued liabilities

5,851

 

5,242

 

18,004

Deferred revenue

174,065

 

175,454

 

140,346

Total current liabilities

255,832

 

251,139

 

218,509

 

 

 

 

 

 

Deferred income tax

15,273

 

15,364

 

10,580

Minimum pension liability

9,899

 

9,899

 

9,101

Other liabilities

7,832

 

7,495

 

7,121

Total liabilities

288,836

 

283,897

 

245,311

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

Preferred stock, $.01 par value,

 

 

 

 

 

5,000,000 shares authorized, none

 

 

 

 

 

issued or outstanding

--

 

--

 

--

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

 

 

 

 

 

shares authorized, 54,068,904 issued

540

 

540

 

540

and outstanding

 

 

 

 

 

Capital surplus

59,436

 

68,715

 

62,914

Retained earnings

434,264

 

389,679

 

330,325

Accumulated other comprehensive loss

(6,016)

 

(6,016)

 

(5,532)

Treasury stock, 11,738,007, 8,377,780 and 7,822,422

 

 

 

 

 

shares, at cost

(357,593)

 

(144,324)

 

(108,165)

Total shareholders' equity

130,631

 

308,594

 

280,082

Total liabilities and shareholders' equity

$419,467

 

$592,491

 

$525,393

 

 

-11-

 


 

 

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

Six Months

 

Ended June 30,

 

 

Ended June 30,

 

2006

 

2005

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

Revenue

$185,569

 

$168,782

 

 

$361,884

 

328,935

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

Cost of educational services

92,514

 

81,795

 

 

182,918

 

161,916

Student services and administrative expenses

56,465

 

52,165

 

 

112,577

 

101,359

Special legal and other investigation costs

--

 

--

 

 

(430)

 

7,712

Total costs and expenses

148,979

 

133,960

 

 

295,065

 

270,987

 

 

 

 

 

 

 

 

 

Operating income

36,590

 

34,822

 

 

66,819

 

57,948

Interest income, net

2,010

 

2,205

 

 

4,517

 

3,919

Income before provision for income taxes

38,600

 

37,027

 

 

71,336

 

61,867

Income taxes

14,489

 

14,626

 

 

26,751

 

24,438

 

 

 

 

 

 

 

 

 

Net income

$24,111

 

$22,401

 

 

$44,585

 

$37,429

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

$0.56

 

$0.49

 

 

$1.01

 

$0.81

Diluted

$0.55

 

$0.48

 

 

$0.99

 

$0.79

 

 

 

 

 

 

 

 

 

Supplemental Data:

 

 

 

 

 

 

 

 

Cost of educational services

49.9%

 

48.5%

 

 

50.5%

 

49.2%

Student services and administrative expenses

30.4%

 

30.9%

 

 

31.1%

 

30.8%

Special legal and other investigation costs

0.0%

 

0.0%

 

 

(0.1%)

 

2.4%

Operating margin

19.7%

 

20.6%

 

 

18.5%

 

17.6%

Student enrollment at end of period

44,025

 

41,419

 

 

44,025

 

41,419

Technical institutes at end of period

87

 

79

 

 

87

 

79

Shares for earnings per share calculation:

 

 

 

 

 

 

 

 

Basic

43,110

 

46,181

 

 

43,967

 

46,134

Diluted

44,042

 

47,134

 

 

44,920

 

47,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

37.5%

 

39.5%

 

 

37.5%

 

39.5%

 

 

 

-12-

 


 

 

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

 

 

 

 

Three Months

 

Six Months

 

Ended June 30,

 

Ended June 30,

 

2006

 

2005

 

2006

 

2005

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$24,111

 

$22,401

 

$44,585

 

$37,429

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

 

 

from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

5,096

 

4,442

 

9,994

 

8,738

Provision for doubtful accounts

2,783

 

3,028

 

5,332

 

5,899

Deferred income taxes

(94)

 

1,184

 

(858)

 

(2,420)

Excess tax benefit from stock option exercises

(3,802)

 

964

 

(6,966)

 

2,969

Stock-based compensation expense

313

 

--

 

2,234

 

--

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

--

 

--

 

--

 

8,194

Accounts receivable

(2,744)

 

(3,965)

 

(1,079)

 

(9,191)

Prepaids and other assets

1,494

 

352

 

(14,697)

 

(9,130)

Direct marketing costs, net

(1,200)

 

(888)

 

(2,102)

 

(1,784)

Accounts payable and accrued liabilities

18,990

 

2,660

 

4,558

 

11,524

Income and other taxes

(243)

 

(2,602)

 

11,793

 

(5,800)

Deferred revenue

(5,261)

 

(10,317)

 

(1,389)

 

(16,446)

Net cash flows from operating activities

39,443

 

17,259

 

51,405

 

29,982

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Facility expenditures and land purchases

(5,864)

 

(10,232)

 

(10,813)

 

(19,816)

Capital expenditures, net

(9,476)

 

(6,859)

 

(13,089)

 

(10,005)

Proceeds from sales and maturities of investments

433,586

 

116,331

 

806,121

 

310,078

Purchase of investments

(359,140)

 

(106,375)

 

(614,385)

 

(286,934)

Net cash flows from investing activities

59,106

 

(7,135)

 

167,834

 

(6,677)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Excess tax benefit from stock option exercises

3,802

 

--

 

6,966

 

--

Proceeds from stock option exercises

5,549

 

1,584

 

14,767

 

4,589

Purchase of treasury stock

(106,499)

 

--

 

(246,634)

 

--

Net cash flows from financing activities

(97,148)

 

1,584

 

(224,901)

 

4,589

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

1,401

 

11,708

 

(5,662)

 

27,894

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

6,672

 

25,575

 

13,735

 

9,389

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$8,073

 

$37,283

 

$8,073

 

$37,283

 

 

 

-13-