UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT (Date of earliest event reported): July 27, 2015
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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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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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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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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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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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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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The press release issued by ITT Educational Services, Inc. (the “Company”) dated July 30, 2015 reporting the Company’s results of operations and financial condition for the Company’s fiscal quarter ended June 30, 2015, is incorporated herein by reference and furnished to the Securities and Exchange Commission with this report as Exhibit 99.1.
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Item 5.02.
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Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
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Interim Chief Financial Officer
On July 30, 2015, the Company announced that its Board of Directors has elected Rocco F. Tarasi, III as the Company’s interim Executive Vice President, Chief Financial Officer, to be effective on the business day immediately following the date on which the Company files its Quarterly Report on Form 10-Q for its quarter ended June 30, 2015 (the effective date of Mr. Tarasi’s election being referred to as the “Effective Date”). Daniel M. Fitzpatrick will remain in his current position as Executive Vice President, Chief Financial Officer of the Company, and will continue to perform all of the functions of the Company’s principal financial officer, through the filing of the Form 10-Q and until the Effective Date.
Mr. Tarasi, age 43, has served as the Company’s Senior Vice President, President – The Center for Professional Development since January 2013. He served as the Company’s Vice President, Finance – Corporate Strategy and Development from October 2011 through January 2013. Mr. Tarasi was the co-founder of BrainCredits Corporation, an education start-up, from August 2010 through October 2011, and served as managing director, policyIQ for Resources Global Professionals, a multinational professional services firm, from July 2003 through August 2010. Mr. Tarasi began his professional career with Arthur Andersen and held various positions in the firm’s audit practice for more than five years, including senior auditor and audit manager. Mr. Tarasi is a certified public accountant (inactive).
In connection with his appointment as interim Chief Financial Officer, Mr. Tarasi will not receive any adjustment to his base salary, which is currently $221,450, or his short-term compensation arrangement in which he participates at the 50% short-term compensation percentage of base salary level. The Compensation Committee of the Board of Directors of the Company has approved a grant of restricted stock units on the third trading day after the Effective Date to Mr. Tarasi that have a value of $50,000, based on the closing price of the Company’s common stock on the date of grant. The restricted stock units will vest, subject to Mr. Tarasi’s continued employment with the Company, in thirds on the first, second and third anniversaries of the grant date or, if earlier, upon his termination of employment due to death or disability.
Following the Effective Date, Mr. Fitzpatrick will remain employed by the Company and will become a Special Advisor to the interim Chief Financial Officer, as permitted by the previously-disclosed Letter Agreement entered into between Mr. Fitzpatrick and the Company, dated as of April 29, 2015 (the “Fitzpatrick Letter Agreement”). The Fitzpatrick Letter Agreement provided that Mr. Fitzpatrick would remain employed by the Company until October 29, 2015, subject to earlier termination by the Company. The Company’s Board of Directors has determined that Mr. Fitzpatrick’s employment with the Company will end prior to that date, on the 30th day following the Effective Date (the “Separation Date”), given that Mr. Fitzpatrick will serve as a Special Advisor to Mr. Tarasi to assist in the transition of duties to Mr. Tarasi during that time and will become a consultant to the Company for a period of 18 months following the Separation Date, as provided in the Fitzpatrick Letter Agreement. The Fitzpatrick Letter Agreement provides that, unless Mr. Fitzpatrick’s employment is earlier terminated for cause, he will be entitled to a lump sum payment within 30 days of the Separation Date equal to the base salary he would have been paid from the Separation Date to October 29, 2015, and 18 times the monthly COBRA premium, subject to his execution of a release agreement.
As previously disclosed, the Fitzpatrick Letter Agreement provides that during the 18-month period following his Separation Date, Mr. Fitzpatrick will serve as a consultant to the Company in exchange for a monthly fee equivalent to his current monthly base salary and continued vesting of his equity-based awards. The form of Mr. Fitzpatrick’s Consulting Agreement is attached as an exhibit to the Fitzpatrick Letter Agreement as filed with the Securities and Exchange Commission.
The foregoing description is qualified in its entirety by reference to the Fitzpatrick Letter Agreement, including the form Consulting Agreement, a copy of which was attached as Exhibit 10.1, and the Amendment to Equity Award Agreements, a copy of which was attached as Exhibit 10.2, to the Company’s Current Report on Form 8-K filed on April 29, 2015, and are incorporated herein by reference.
A copy of the press release announcing these changes is attached hereto as Exhibit 99.1 and is incorporated herein by reference.
Amendment to CEO Letter Agreement
On July 29, 2015, the Company and Kevin M. Modany, the Company’s Chief Executive Officer, entered into a third amendment (the “Third Amendment”) to the letter agreement between Mr. Modany and the Company dated August 4, 2014 (as amended, the “Modany Letter Agreement”). Pursuant to the Third Amendment, the parties agreed to extend the Applicable Period (as provided for and defined in the Modany Letter Agreement) to December 31, 2015. The foregoing description of the Third Amendment is qualified in its entirety by reference to the Third Amendment, a copy of which is filed herewith Exhibit 10.1 and is incorporated herein by reference.
Short-Term Compensation for CEO and CFO
On July 27, 2015, the Compensation Committee of the Company’s Board of Directors established a short-term compensation opportunity for Mr. Modany related to 2015. The Compensation Committee had not included Mr. Modany in the Company’s 2015 short-term compensation arrangement in January 2015 when it established that arrangement for other executive officers, as previously disclosed, due to the fact that, at that time, it was expected that Mr. Modany would not be serving as the Company’s Chief Executive Officer for any extended period of time in 2015 due to his announced resignation. In July 2015, the Compensation Committee recognized that Mr. Modany has continued to serve in the role of Chief Executive Officer for much longer than originally anticipated, and has diligently worked toward the management objectives contained in the 2015 short-term compensation arrangement (the “2015 Management Objectives”). As a result, the Compensation Committee approved a short-term compensation opportunity for Mr. Modany related to the 2015 Management Objectives, to be pro-rated based on the period of his service as an employee in 2015.
In addition, on July 27, 2015, the Compensation Committee approved a modified short-term compensation opportunity for Mr. Fitzpatrick. Mr. Fitzpatrick previously was eligible for a short-term compensation payment related to the 2015 Management Objectives, but he would have had to have been employed by the Company on the payment date of the short-term compensation, which would be in early 2016. Since Mr. Fitzpatrick’s employment with the Company will end prior to that time, as discussed above, Mr. Fitzpatrick would not have received any payment related to the 2015 short-term compensation arrangement. The Compensation Committee recognized Mr. Fitzpatrick’s contributions in 2015, and determined to provide him with a pro-rated short-term compensation opportunity related to the 2015 Management Objectives, based on the period of his service as an employee in 2015.
The 2015 Management Objectives and their relative weightings under the 2015 short-term compensation arrangement are disclosed in the Company’s Current Report on Form 8-K filed on January 30, 2015 and in the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders filed on June 12, 2015. The determination of the extent to which the 2015 Management Objectives are accomplished will be made by the Compensation Committee in early 2016. The Committee intends to assign zero to five points to each 2015 Management Objective based on the extent to which the Committee determines the objective was accomplished. The total weighted points that are assigned to the 2015 Management Objectives by the Compensation Committee will correlate to a maximum short-term compensation percentage, as described in the Company’s Current Report on Form 8-K filed on January 30, 2015 and in the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders filed on June 12, 2015.
To determine the maximum short-term compensation amount that each of Mr. Modany and Mr. Fitzpatrick may receive, (i) the maximum short-term compensation percentage will be multiplied by (ii) a standard short-term compensation percentage (100% for Mr. Modany and 65% for Mr. Fitzpatrick) of annualized base salary as of the earlier of his last day of employment in 2015 or December 31, 2015, and the result will be multiplied by (iii) the officer’s annualized base salary, and that result will be pro-rated, based on (iv) the number of days that he served as an employee of the Company during 2015, divided by 365.
Under the terms of the 2015 short-term compensation arrangement applicable to all executive officers, the Compensation Committee has the ability to determine that an executive officer’s actual short-term compensation payment may be more or less than the officer’s potential short-term compensation as calculated as described above. An executive officer’s actual short-term compensation amount will be based on the Compensation Committee’s discretionary assessment of the officer’s individual contribution toward accomplishing each 2015 Management Objective. Any 2015 short-term compensation payment will be made in cash. The Compensation Committee may, in its sole discretion, modify the terms of the short-term compensation element at any time before it is paid.
Item 9.01. Financial Statements and Exhibits.
The following exhibits are being filed herewith:
Exhibit No. Description
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10.1
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Third Amendment to Letter Agreement, dated as of July 29, 2015, by and between ITT Educational Services, Inc. and Kevin M. Modany
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99.1
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Press Release issued by ITT Educational Services, Inc. dated July 30, 2015.
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Except for the historical information contained herein, the matters discussed in this document 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 impact of the company’s late filings with the SEC, including the 2014 Form 10-K and the first quarter 2015 Form 10-Q; the impact of adverse actions by the ED related to the action by the U.S. Securities and Exchange Commission against the company and the company’s failure to submit its 2013 audited financial statements and 2013 compliance audits with the U.S. Department of Education 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 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.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: July 30, 2015
ITT Educational Services, Inc.
By: /s/ Ryan L. Roney
Name: Ryan L. Roney
Title: Executive Vice President, Chief
Administrative and Legal Officer and Secretary
INDEX TO EXHIBITS
Exhibit No. Description
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10.1
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Third Amendment to Letter Agreement, dated as of July 29, 2015, by and between ITT Educational Services, Inc. and Kevin M. Modany
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99.1
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Press Release issued by ITT Educational Services, Inc. dated July 30, 2015.
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Exhibit 99.1
ITT EDUCATIONAL SERVICES, INC.
REPORTS 2015 SECOND QUARTER RESULTS AND
ANNOUNCES EXECUTIVE LEADERSHIP DEVELOPMENTS
CARMEL, IN, July 30, 2015—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 2015 increased to $0.47 compared to $0.17 in the first six months of 2014. New student enrollment in the second quarter of 2015 decreased 18.6% to 12,638 compared to 15,523 in the same period in 2014. Total student enrollment decreased 13.7% to 47,874 as of June 30, 2015 compared to 55,485 as of June 30, 2014.
The company provided the following information for the three and six months ended June 30, 2015 and 2014:
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Financial and Operating Data for the Three Months Ended June 30th, Unless Otherwise Indicated
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(Dollars in millions, except per share, per student data and average annual salary data)
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Increase/
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2015
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2014
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(Decrease)
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Revenue
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$ |
214.2 |
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$ |
238.1 |
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(10.0 |
)% |
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Operating Income
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$ |
11.6 |
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$ |
6.8 |
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70.6 |
% |
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Operating Margin
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5.4 |
% |
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2.9 |
% |
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250 basis points
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Net Income
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$ |
0.7 |
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$ |
0.4 |
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82.7 |
% |
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Earnings Per Share (diluted)
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$ |
0.03 |
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$ |
0.02 |
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50 |
% |
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New Student Enrollment
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12,638 |
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15,523 |
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(18.6 |
)% |
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Continuing Students
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35,236 |
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39,962 |
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(11.8 |
)% |
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Total Student Enrollment as of June 30th
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47,874 |
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55,485 |
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(13.7 |
)% |
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Persistence Rate as of June 30th (A)
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68.8 |
% |
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70.0 |
% |
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(120) basis points
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Bad Debt Expense as a Percentage of Revenue
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4.1 |
% |
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5.8 |
% |
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(170) basis points
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Days Sales Outstanding as of June 30th
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19.2 days
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26.3 days
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(7.1) days
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Deferred Revenue as of June 30th
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$ |
119.6 |
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$ |
131.4 |
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(9.0 |
)% |
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Cash and Cash Equivalents as of June 30th
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$ |
124.6 |
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$ |
225.0 |
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(44.6 |
)% |
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Restricted Cash as of June 30th
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$ |
6.9 |
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$ |
2.8 |
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150.6 |
% |
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Collateral Deposits as of June 30th
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$ |
97.9 |
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$ |
8.6 |
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1034.5 |
% |
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Private Education Loans (current and non-current), Less Allowance for Loan Losses, as of June 30th (B)
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$ |
79.1 |
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$ |
73.4 |
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7.7 |
% |
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PEAKS Trust Senior Debt (current and long-term) as of June 30th (C)
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$ |
54.1 |
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$ |
190.9 |
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(71.7 |
)% |
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CUSO Obligation (current and long-term) as of June 30th (D)
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$ |
111.1 |
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$ |
113.5 |
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(2.1 |
)% |
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Financing Agreement/Credit Agreement (current and long-term) as of June 30th (E)
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$ |
92.1 |
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$ |
50.0 |
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84.3 |
% |
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Weighted Average Diluted Shares of Common Stock Outstanding
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24,086,000 |
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23,785,000 |
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Capital Expenditures, Net
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$ |
1.6 |
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$ |
1.1 |
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43.0 |
% |
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Graduate Employment Rate as of April 30th
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73 |
% (F) |
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70 |
% (G) |
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300 basis points
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Average Annual Reported Graduate Salary as of April 30th
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$ |
34,500 |
(H) |
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$ |
33,400 |
(I) |
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3.3 |
% |
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Financial and Operating Data for the Six Months Ended June 30th
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(Dollars in millions, except per share and per student data)
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2015
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2014
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Increase/
(Decrease)
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Revenue
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$ |
444.2 |
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$ |
476.0 |
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(6.7 |
)% |
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Operating Income
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$ |
39.3 |
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$ |
19.8 |
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97.9 |
% |
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Operating Margin
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8.8 |
% |
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4.2 |
% |
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460 basis points
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Net Income
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$ |
11.2 |
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$ |
4.0 |
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178.1 |
% |
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Earnings Per Share (diluted)
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$ |
0.47 |
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$ |
0.17 |
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176.5 |
% |
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Bad Debt Expense as a Percentage of Revenue
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4.7 |
% |
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6.4 |
% |
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(170) basis points
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Weighted Average Diluted Shares of Common Stock Outstanding
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23,953,000 |
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23,815,000 |
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Capital Expenditures, Net
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$ |
2.5 |
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$ |
2.7 |
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(5.6 |
)% |
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(A)
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Represents the number of Continuing Students in the academic term, divided by the Total Student Enrollment in the immediately preceding academic term.
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(B)
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With respect to the private education loans as of June 30, 2015, the amount included $9.4 million classified as current, and $69.7 million classified as non-current. With respect to the private education loans as of June 30, 2014, the amount included $7.4 million classified as current, and $66.0 million classified as non-current.
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(C)
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With respect to the PEAKS Trust Senior Debt as of June 30, 2015, the amount included $23.1 million classified as current, and $31.0 million classified as non-current. With respect to the PEAKS Trust Senior Debt as of June 30, 2014, the amount included $132.4 million classified as current, and $58.4 million classified as non-current.
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(D)
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As of June 30, 2015, this amount represented the CUSO secured borrowing obligation recorded on the company’s balance sheet, $19.8 million of which was classified as current and $91.3 million of which was classified as non-current. As of June 30, 2014, this amount represented the contingent liability amount recorded on the company’s balance sheet related to the company’s guarantee obligations under the CUSO risk sharing agreement. Beginning on September 30, 2014, the CUSO was consolidated in the company’s consolidated financial statements, resulting in the elimination of the contingent liability related to the CUSO risk sharing agreement that the company had previously recorded, and resulting in the company instead recording the estimated amount of the CUSO’s obligations to its owners related to their participation interests in the private education loans made under the CUSO program.
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(E)
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With respect to the company’s Financing Agreement as of June 30, 2015, the amount included $14.5 million classified as current, and $77.6 million classified as non-current. With respect to the company’s Credit Agreement as of June 30, 2014, the full $50.0 million was classified as current.
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(F)
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Represents the percentage of the ITT Technical Institutes’ 2014 employable graduates who obtained employment in positions using skills taught in their programs of study as of April 30, 2015.
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(G)
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Represents the percentage of the ITT Technical Institutes’ 2013 employable graduates who obtained employment in positions using skills taught in their programs of study as of April 30, 2014.
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(H)
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Represents the average annual salary reported by the ITT Technical Institutes’ 2014 employed graduates as of April 30, 2015.
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(I)
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Represents the average annual salary reported by the ITT Technical Institutes’ 2013 employed graduates as of April 30, 2014.
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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:
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·
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$16.2 million in 2017; and
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·
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$84.6 million in 2018 and later, which amount includes an approximately $15.3 million payment in 2020 under the PEAKS guarantee.
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These estimated payment amounts are net of estimated aggregate recoveries of approximately $6.0 million under the CUSO RSA, which the company 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, 2015 when it is filed with the U.S. Securities and Exchange Commission, which report will contain additional information regarding these estimated payment amounts, including the assumptions used, the estimates of the type of payments, regular or discharge, and estimated recoveries, under the CUSO RSA and the estimated different payment amounts if the assumptions regarding the forms of payments made under the CUSO RSA are not realized.
The company also announced that it has entered into a third amendment to the letter agreement with its Chief Executive Officer, Kevin M. Modany, to extend to December 31, 2015 the period during which he will remain in his current position.
In addition, the company announced that its Board of Directors has elected Rocco F. Tarasi, III as the Company’s interim Executive Vice President, Chief Financial Officer, to be effective on the business day immediately following the date on which the company files its Quarterly Report on Form 10-Q for its quarter ended June 30, 2015 (the effective date of Mr. Tarasi’s election being referred to as the “Effective Date”). The company believes that it will file the Form 10-Q within the next few days. Daniel M. Fitzpatrick will remain in his current position as Executive Vice President, Chief Financial Officer of the company, and will continue to perform all of the functions of the company’s principal financial officer, through the filing of the Form 10-Q and until the Effective Date. Following the Effective Date, Mr. Fitzpatrick will remain employed by the company for 30 days as Special Advisor to the interim Chief Financial Officer, after which he will become a consultant to the company for a period of 18 months.
Mr. Tarasi, age 43, has served as the company’s Senior Vice President, President – The Center for Professional Development since January 2013. He served as the company’s Vice President, Finance – Corporate Strategy and Development from October 2011 through January 2013. Mr. Tarasi was the co-founder of BrainCredits Corporation, an education start-up, from August 2010 through October 2011, and served as managing director, policyIQ for Resources Global Professionals, a multinational professional services firm, from July 2003 through August 2010. Mr. Tarasi began his professional career with Arthur Andersen and held various positions in the firm’s audit practice for more than five years, including senior auditor and audit manager. Mr. Tarasi is a certified public accountant (inactive).
ITT Educational Services, Inc. will conduct a conference call with financial analysts to discuss its 2015 second 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 document or in the attached press release 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 impact of the company’s late filings with the SEC, including the 2014 Form 10-K and the first quarter 2015 Form 10-Q; any inability to file the second quarter 2015 Form 10-Q in the time indicated; the impact of adverse actions by the ED related to the action by the U.S. Securities and Exchange Commission against the company and 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 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.
FOR FURTHER INFORMATION:
COMPANY: WEB SITE:
Nicole Elam, Vice President www.ittesi.com
(317) 706-9200
|
ITT EDUCATIONAL SERVICES, INC.
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
(Dollars in thousands, except per share data)
|
|
|
(unaudited)
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
As of
|
|
| |
|
June 30, 2015
|
|
|
December 31, 2014
|
|
|
June 30, 2014
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
124,632 |
|
|
$ |
135,937 |
|
|
$ |
224,956 |
|
|
Restricted cash
|
|
|
6,936 |
|
|
|
6,040 |
|
|
|
2,768 |
|
|
Accounts receivable, net
|
|
|
45,204 |
|
|
|
46,383 |
|
|
|
68,937 |
|
|
Private education loans, net
|
|
|
9,379 |
|
|
|
10,584 |
|
|
|
7,420 |
|
|
Deferred income taxes
|
|
|
24,795 |
|
|
|
34,547 |
|
|
|
67,415 |
|
|
Prepaid expenses and other current assets
|
|
|
57,294 |
|
|
|
57,923 |
|
|
|
36,056 |
|
|
Total current assets
|
|
|
268,240 |
|
|
|
291,414 |
|
|
|
407,552 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
150,095 |
|
|
|
157,072 |
|
|
|
158,947 |
|
|
Private education loans, excluding current portion, net
|
|
|
69,724 |
|
|
|
80,292 |
|
|
|
65,997 |
|
|
Deferred income taxes
|
|
|
63,447 |
|
|
|
68,041 |
|
|
|
78,218 |
|
|
Collateral deposits
|
|
|
97,873 |
|
|
|
97,932 |
|
|
|
8,627 |
|
|
Other assets
|
|
|
61,921 |
|
|
|
54,409 |
|
|
|
56,878 |
|
|
Total assets
|
|
$ |
711,300 |
|
|
$ |
749,160 |
|
|
$ |
776,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$ |
14,546 |
|
|
$ |
9,635 |
|
|
$ |
50,000 |
|
|
Current portion of PEAKS Trust senior debt
|
|
|
23,068 |
|
|
|
37,545 |
|
|
|
132,429 |
|
|
Current portion of CUSO secured borrowing obligation
|
|
|
19,750 |
|
|
|
20,813 |
|
|
|
0 |
|
|
Accounts payable
|
|
|
76,476 |
|
|
|
67,848 |
|
|
|
75,918 |
|
|
Accrued compensation and benefits
|
|
|
16,535 |
|
|
|
12,264 |
|
|
|
23,320 |
|
|
Other current liabilities
|
|
|
27,288 |
|
|
|
27,050 |
|
|
|
46,233 |
|
|
Deferred revenue
|
|
|
119,568 |
|
|
|
147,475 |
|
|
|
131,378 |
|
|
Total current liabilities
|
|
|
297,231 |
|
|
|
322,630 |
|
|
|
459,278 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current portion
|
|
|
77,579 |
|
|
|
86,714 |
|
|
|
0 |
|
|
PEAKS Trust senior debt, excluding current portion
|
|
|
31,007 |
|
|
|
38,658 |
|
|
|
58,442 |
|
|
CUSO secured borrowing obligation, excluding current portion
|
|
|
91,339 |
|
|
|
100,194 |
|
|
|
0 |
|
|
Other liabilities
|
|
|
59,049 |
|
|
|
52,959 |
|
|
|
138,361 |
|
|
Total liabilities
|
|
|
556,205 |
|
|
|
601,155 |
|
|
|
656,081 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
186,501 |
|
|
|
198,883 |
|
|
|
198,806 |
|
|
Retained earnings
|
|
|
980,833 |
|
|
|
969,670 |
|
|
|
944,431 |
|
|
Accumulated other comprehensive (loss)
|
|
|
725 |
|
|
|
1,201 |
|
|
|
2,670 |
|
|
Treasury stock, 13,490,795, 13,619,010 and 13,665,129 shares at cost
|
|
|
(1,013,335 |
) |
|
|
(1,022,120 |
) |
|
|
(1,026,140 |
) |
|
Total shareholders' equity
|
|
|
155,095 |
|
|
|
148,005 |
|
|
|
120,138 |
|
|
Total liabilities and shareholders' equity
|
|
$ |
711,300 |
|
|
$ |
749,160 |
|
|
$ |
776,219 |
|
|
ITT EDUCATIONAL SERVICES, INC.
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
(Dollars in thousands, except per share data)
|
|
|
(unaudited)
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months
|
|
|
Six Months
|
|
| |
|
Ended June 30,
|
|
|
Ended June 30,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
214,231 |
|
|
$ |
238,096 |
|
|
$ |
444,206 |
|
|
$ |
476,019 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of educational services
|
|
|
101,865 |
|
|
|
116,276 |
|
|
|
205,418 |
|
|
|
236,391 |
|
|
Student services and administrative expenses
|
|
|
91,408 |
|
|
|
97,547 |
|
|
|
181,660 |
|
|
|
196,785 |
|
|
Legal and professional fees related to certain lawsuits, investigations and accounting matters
|
|
|
6,005 |
|
|
|
8,380 |
|
|
|
13,291 |
|
|
|
13,927 |
|
|
Provision for private education loan losses
|
|
|
3,313 |
|
|
|
9,071 |
|
|
|
4,557 |
|
|
|
9,071 |
|
|
Total costs and expenses
|
|
|
202,591 |
|
|
|
231,274 |
|
|
|
404,926 |
|
|
|
456,174 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
11,640 |
|
|
|
6,822 |
|
|
|
39,280 |
|
|
|
19,845 |
|
|
Interest income
|
|
|
22 |
|
|
|
15 |
|
|
|
35 |
|
|
|
34 |
|
|
Interest (expense)
|
|
|
(9,991 |
) |
|
|
(6,263 |
) |
|
|
(20,379 |
) |
|
|
(13,164 |
) |
|
Income before provision for income taxes
|
|
|
1,671 |
|
|
|
574 |
|
|
|
18,936 |
|
|
|
6,715 |
|
|
Provision for income taxes
|
|
|
955 |
|
|
|
182 |
|
|
|
7,773 |
|
|
|
2,701 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
716 |
|
|
$ |
392 |
|
|
$ |
11,163 |
|
|
$ |
4,014 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.03 |
|
|
$ |
0.02 |
|
|
$ |
0.47 |
|
|
$ |
0.17 |
|
|
Diluted
|
|
$ |
0.03 |
|
|
$ |
0.02 |
|
|
$ |
0.47 |
|
|
$ |
0.17 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of educational services
|
|
|
47.5 |
% |
|
|
48.8 |
% |
|
|
46.2 |
% |
|
|
49.7 |
% |
|
Student services and administrative expenses
|
|
|
42.7 |
% |
|
|
41.0 |
% |
|
|
40.9 |
% |
|
|
41.3 |
% |
|
Legal and professional fees related to certain lawsuits, investigations and accounting matters
|
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
3.0 |
% |
|
|
2.9 |
% |
|
Provision for private education loan losses
|
|
|
1.5 |
% |
|
|
3.8 |
% |
|
|
1.0 |
% |
|
|
1.9 |
% |
|
Operating margin
|
|
|
5.4 |
% |
|
|
2.9 |
% |
|
|
8.8 |
% |
|
|
4.2 |
% |
|
Student enrollment at end of period
|
|
|
47,874 |
|
|
|
55,485 |
|
|
|
47,874 |
|
|
|
55,485 |
|
|
Campuses at end of period
|
|
|
141 |
|
|
|
148 |
|
|
|
141 |
|
|
|
148 |
|
|
Shares for earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,621,000 |
|
|
|
23,459,000 |
|
|
|
23,591,000 |
|
|
|
23,453,000 |
|
|
Diluted
|
|
|
24,086,000 |
|
|
|
23,785,000 |
|
|
|
23,953,000 |
|
|
|
23,815,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
57.2 |
% |
|
|
31.7 |
% |
|
|
41.0 |
% |
|
|
40.2 |
% |
|
ITT EDUCATIONAL SERVICES, INC.
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
(Dollars in thousands)
|
|
|
(unaudited)
|
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months
|
|
|
Six Months
|
|
| |
|
Ended June 30,
|
|
|
Ended June 30,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
716 |
|
|
$ |
392 |
|
|
$ |
11,163 |
|
|
$ |
4,014 |
|
|
Adjustments to reconcile net income to net cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,061 |
|
|
|
6,508 |
|
|
|
12,042 |
|
|
|
12,970 |
|
|
Provision for doubtful accounts
|
|
|
8,692 |
|
|
|
13,767 |
|
|
|
20,875 |
|
|
|
30,382 |
|
|
Deferred income taxes
|
|
|
2,554 |
|
|
|
(1,594 |
) |
|
|
12,423 |
|
|
|
(2,010 |
) |
|
Stock-based compensation expense
|
|
|
1,364 |
|
|
|
2,311 |
|
|
|
3,260 |
|
|
|
4,862 |
|
|
Accretion of discount on private education loans
|
|
|
(2,948 |
) |
|
|
(3,239 |
) |
|
|
(6,029 |
) |
|
|
(6,372 |
) |
|
Accretion of discount on long-term debt
|
|
|
385 |
|
|
|
0 |
|
|
|
776 |
|
|
|
0 |
|
|
Accretion of discount on PEAKS Trust senior debt
|
|
|
1,365 |
|
|
|
1,441 |
|
|
|
3,020 |
|
|
|
2,982 |
|
|
Accretion of discount on CUSO secured borrowing obligation
|
|
|
214 |
|
|
|
0 |
|
|
|
433 |
|
|
|
0 |
|
|
Provision for private education loan losses
|
|
|
3,313 |
|
|
|
9,071 |
|
|
|
4,557 |
|
|
|
9,071 |
|
|
Other
|
|
|
(148 |
) |
|
|
(248 |
) |
|
|
(415 |
) |
|
|
(428 |
) |
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(608 |
) |
|
|
1,525 |
|
|
|
(896 |
) |
|
|
2,868 |
|
|
Accounts receivable
|
|
|
(7,696 |
) |
|
|
(5,320 |
) |
|
|
(19,696 |
) |
|
|
982 |
|
|
Private education loans
|
|
|
6,601 |
|
|
|
4,083 |
|
|
|
13,245 |
|
|
|
8,093 |
|
|
Accounts payable
|
|
|
848 |
|
|
|
8,582 |
|
|
|
6,390 |
|
|
|
17,897 |
|
|
Other operating assets and liabilities
|
|
|
(1,931 |
) |
|
|
(5,545 |
) |
|
|
(1,214 |
) |
|
|
(9,430 |
) |
|
Deferred revenue
|
|
|
(20,288 |
) |
|
|
(10,171 |
) |
|
|
(27,907 |
) |
|
|
(17,400 |
) |
|
Net cash flows from operating activities
|
|
|
(1,506 |
) |
|
|
21,563 |
|
|
|
32,027 |
|
|
|
58,481 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
(1,640 |
) |
|
|
(1,147 |
) |
|
|
(2,509 |
) |
|
|
(2,657 |
) |
|
Acquisition of company
|
|
|
0 |
|
|
|
(584 |
) |
|
|
0 |
|
|
|
(5,033 |
) |
|
Collateralization of letters of credit
|
|
|
60 |
|
|
|
0 |
|
|
|
60 |
|
|
|
0 |
|
|
Proceeds from repayment of notes
|
|
|
0 |
|
|
|
97 |
|
|
|
0 |
|
|
|
193 |
|
|
Purchase of investments
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
Net cash flows from investing activities
|
|
|
(1,581 |
) |
|
|
(1,635 |
) |
|
|
(2,350 |
) |
|
|
(7,498 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(2,500 |
) |
|
|
0 |
|
|
|
(5,000 |
) |
|
|
0 |
|
|
Repayment of PEAKS Trust senior debt
|
|
|
(9,380 |
) |
|
|
0 |
|
|
|
(25,026 |
) |
|
|
(41,070 |
) |
|
Repayment of CUSO secured borrowing obligation
|
|
|
(6,314 |
) |
|
|
0 |
|
|
|
(10,351 |
) |
|
|
0 |
|
|
Common shares tendered for taxes
|
|
|
(38 |
) |
|
|
(7 |
) |
|
|
(505 |
) |
|
|
(728 |
) |
|
Net cash flows from financing activities
|
|
|
(18,232 |
) |
|
|
(7 |
) |
|
|
(40,882 |
) |
|
|
(41,798 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(21,319 |
) |
|
|
19,921 |
|
|
|
(11,305 |
) |
|
|
9,185 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
145,951 |
|
|
|
205,035 |
|
|
|
135,937 |
|
|
|
215,771 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
124,632 |
|
|
$ |
224,956 |
|
|
$ |
124,632 |
|
|
$ |
224,956 |
|
Exhibit 10.1
July 29, 2015
Mr. Kevin M. Modany
ITT Educational Services, Inc.
13000 North Meridian Street
Carmel, IN 46032-1404
Re: Third Amendment to Letter Agreement
Dear Kevin:
Reference is made to that certain letter agreement, dated as of August 4, 2014, between you and ITT Educational Services, Inc. (the “Company”), and the amendments to that letter agreement, dated as of April 28, 2015 and May 26, 2015 (as so amended, the “Letter Agreement”). You and the Company hereby agree to extend the Applicable Period (as defined and used in the Letter Agreement) to and including December 31, 2015. Other than such amendment, all other terms and conditions of the Letter Agreement remain in full force and effect without modification.
If the foregoing accurately reflects our agreement, please sign and return to us the enclosed duplicate copy of this letter.
ITT EDUCATIONAL SERVICES, INC.
By: /s/ John E. Dean
Name: John E. Dean
Title: Executive Chairman
Accepted and Agreed to:
/s/ Kevin M. Modany
Kevin M. Modany
ITT Educational Services (CE) (USOTC:ESINQ)
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