UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

 

Commission file number

1-13144

 

ITT EDUCATIONAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-2061311

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

13000 North Meridian Street
Carmel, Indiana

 

46032-1404

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (317) 706-9200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

Yes x

No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o (Do not check if

                                          a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Yes o

No x

 

 

38,692,185

Number of shares of Common Stock, $.01 par value, outstanding at September 30, 2008

ITT EDUCATIONAL SERVICES, INC.

Carmel, Indiana

 

Quarterly Report to Securities and Exchange Commission

September 30, 2008

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

Index

 

 

Condensed Consolidated Balance Sheets as of September 30, 2008 and 2007 (unaudited) and

December 31, 2007

 

Condensed Consolidated Statements of Income (unaudited) for the three and nine months ended

September 30, 2008 and 2007

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended

September 30, 2008 and 2007

 

Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended

September 30, 2008 and 2007 (unaudited) and the year ended December 31, 2007

 

Notes to Condensed Consolidated Financial Statements

 

 

- 1 -


ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

As of

 

 

 

September 30, 2008

 

December 31, 2007

 

September 30, 2007

 

(unaudited)

 

 

 

(unaudited)

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$136,698

 

$7,228

 

$10,322

Short-term investments

150,000

 

303,360

 

261,760

Accounts receivable, net

33,309

 

15,132

 

16,351

Deferred income taxes

13,012

 

7,418

 

10,216

Prepaid expenses and other current assets

12,997

 

16,685

 

11,825

Total current assets

346,016

 

349,823

 

310,474

 

 

 

 

 

 

Property and equipment, net

166,140

 

153,265

 

153,394

Direct marketing costs, net

22,694

 

20,567

 

21,195

Other assets

19,481

 

17,298

 

12,285

Total assets

$554,331

 

$540,953

 

$497,348

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

$--

 

$--

 

$42,857

Accounts payable

58,781

 

45,120

 

57,658

Accrued compensation and benefits

28,574

 

16,137

 

16,515

Accrued income taxes

1,753

 

6,028

 

313

Other accrued liabilities

12,274

 

11,512

 

12,634

Deferred revenue

142,044

 

213,127

 

192,673

Total current liabilities

243,426

 

291,924

 

322,650

 

 

 

 

 

 

Long-term debt

150,000

 

150,000

 

107,143

Deferred income taxes

10,108

 

11,754

 

11,768

Other liabilities

19,207

 

16,717

 

15,766

Total liabilities

422,741

 

470,395

 

457,327

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

Preferred stock, $.01 par value,

 

 

 

 

 

5,000,000 shares authorized, none issued

--

 

--

 

--

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

 

 

 

 

 

shares authorized, 54,068,904 issued

541

 

541

 

541

Capital surplus

133,723

 

127,017

 

117,407

Retained earnings

670,073

 

531,363

 

502,870

Accumulated other comprehensive (loss)

(3,417)

 

(3,417)

 

(6,280)

Treasury stock, 15,376,719, 14,375,582

 

 

 

 

 

and 14,316,212 shares, at cost

(669,330)

 

(584,946)

 

(574,517)

Total shareholders' equity

131,590

 

70,558

 

40,021

Total liabilities and shareholders' equity

$554,331

 

$540,953

 

$497,348

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 2 -

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2008

 

2007

 

2008

 

2007

Revenue

$254,273

 

$217,932

 

$735,533

 

$639,084

Costs and expenses:

 

 

 

 

 

 

 

Cost of educational services

95,011

 

88,822

 

282,219

 

270,173

Student services and administrative expenses

78,500

 

66,192

 

227,535

 

204,210

Total costs and expenses

173,511

 

155,014

 

509,754

 

474,383

Operating income

80,762

 

62,918

 

225,779

 

164,701

Interest income

1,565

 

2,433

 

4,774

 

8,180

Interest (expense)

(1,012)

 

(2,120)

 

(3,588)

 

(6,303)

Income before provision for income taxes

81,315

 

63,231

 

226,965

 

166,578

Provision for income taxes

31,129

 

23,563

 

87,017

 

63,455

Net income

$50,186

 

$39,668

 

$139,948

 

$103,123

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$1.29

 

$0.99

 

$3.59

 

$2.55

Diluted

$1.28

 

$0.98

 

$3.56

 

$2.51

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

38,777

 

39,958

 

38,938

 

40,437

Diluted

39,195

 

40,572

 

39,291

 

41,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 3 -

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2008

 

2007

 

2008

 

2007

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$50,186

 

$39,668

 

$139,948

 

$103,123

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

 

 

from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

5,077

 

5,030

 

16,335

 

17,770

Provision for doubtful accounts

12,839

 

3,845

 

29,457

 

13,835

Deferred income taxes

(1,948)

 

(839)

 

(7,251)

 

(7,390)

Excess tax benefit from stock option exercises

(686)

 

(6,280)

 

(773)

 

(29,554)

Stock-based compensation expense

1,628

 

896

 

5,731

 

4,067

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

181

 

(642)

 

6,039

 

(655)

Accounts receivable

(16,950)

 

(10,266)

 

(47,634)

 

(20,819)

Direct marketing costs, net

(731)

 

12

 

(2,127)

 

433

Accounts payable

4,375

 

(2,459)

 

13,661

 

9,710

Accrued income taxes

(2,982)

 

16,381

 

(3,467)

 

23,620

Other operating assets and liabilities

4,331

 

7,311

 

11,214

 

7,325

Deferred revenue

3,706

 

281

 

(71,083)

 

(9,489)

Net cash flows from operating activities

59,026

 

52,938

 

90,050

 

111,976

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Facility expenditures and land purchases

(3,944)

 

(2,764)

 

(17,107)

 

(11,460)

Capital expenditures, net

(4,286)

 

(4,351)

 

(12,103)

 

(11,293)

Proceeds from sales and maturities of investments

492,760

 

440,766

 

964,565

 

1,625,072

Purchase of investments

(472,260)

 

(412,241)

 

(811,205)

 

(1,691,825)

Net cash flows from investing activities

12,270

 

21,410

 

124,150

 

(89,506)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Excess tax benefit from stock option exercises

686

 

6,280

 

773

 

29,554

Proceeds from exercise of stock options

1,996

 

6,931

 

2,271

 

24,472

Repurchase of common stock

(15,971)

 

(87,316)

 

(87,774)

 

(228,079)

Net cash flows from financing activities

(13,289)

 

(74,105)

 

(84,730)

 

(174,053)

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

58,007

 

243

 

129,470

 

(151,583)

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

78,691

 

10,079

 

7,228

 

161,905

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$136,698

 

$10,322

 

$136,698

 

$10,322

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

- 4 -

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Common Stock

 

Capital

 

Retained

 

Other

Comprehensive

 

Common Stock in Treasury

 

 

Shares

 

Amount

 

Surplus

 

Earnings

 

Income/(Loss)

 

Shares

 

Amount

 

Total

Balance as of December 31, 2006

54,069

 

$541

 

$83,329

 

$471,848

 

($6,533)

 

(13,029)

 

($445,240)

 

$103,945

Effect of adoption of FIN No. 48

 

 

 

 

 

 

2,169

 

 

 

 

 

 

 

2,169

Balance as of January 1, 2007

54,069

 

541

 

83,329

 

474,017

 

(6,533)

 

(13,029)

 

(445,240)

 

106,114

For the nine months ended September 30, 2007 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

103,123

 

 

 

 

 

 

 

103,123

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension loss, net of income tax

 

 

 

 

 

 

 

 

253

 

 

 

 

 

253

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,376

Exercise of stock options

 

 

 

 

 

 

(74,270)

 

 

 

1,071

 

98,742

 

24,472

Tax benefit from exercise of stock options

 

 

 

 

30,011

 

 

 

 

 

 

 

 

 

30,011

Stock-based compensation

 

 

 

 

4,067

 

 

 

 

 

 

 

 

 

4,067

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(2,359)

 

(228,079)

 

(228,079)

Issuance of shares for Directors’ compensation

 

 

 

 

 

 

 

 

 

 

1

 

60

 

60

Balance as of September 30, 2007

54,069

 

541

 

117,407

 

502,870

 

(6,280)

 

(14,316)

 

(574,517)

 

40,021

For the three months ended December 31, 2007 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

48,469

 

 

 

 

 

 

 

48,469

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension loss, net of tax

 

 

 

 

 

 

 

 

98

 

 

 

 

 

98

Net actuarial pension gain

 

 

 

 

 

 

 

 

2,765

 

 

 

 

 

2,765

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51,332

Exercise of stock options

 

 

 

 

(77)

 

(19,976)

 

 

 

243

 

26,583

 

6,530

Tax benefit from exercise of stock options

 

 

 

 

8,577

 

 

 

 

 

 

 

 

 

8,577

Stock-based compensation

 

 

 

 

1,033

 

 

 

 

 

 

 

 

 

1,033

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(300)

 

(36,915)

 

(36,915)

Restricted stock cancellations and shares tendered for taxes

 

 

 

 

77

 

 

 

 

 

(2)

 

(97)

 

(20)

Balance as of December 31, 2007

54,069

 

541

 

127,017

 

531,363

 

(3,417)

 

(14,375)

 

(584,946)

 

70,558

For the nine months ended September 30, 2008 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

139,948

 

 

 

 

 

 

 

139,948

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

139,948

Exercise of stock options

 

 

 

 

 

 

(1,213)

 

 

 

51

 

3,484

 

2,271

Tax benefit from exercise of stock options

 

 

 

 

796

 

 

 

 

 

 

 

 

 

796

Stock-based compensation

 

 

 

 

5,731

 

 

 

 

 

 

 

 

 

5,731

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(1,050)

 

(87,774)

 

(87,774)

Issuance of shares for Directors’ compensation

 

 

 

 

 

 

(25)

 

 

 

1

 

85

 

60

Restricted stock cancellations

 

 

 

 

179

 

 

 

 

 

(3)

 

(179)

 

--

Balance as of September 30, 2008

54,069

 

$541

 

$133,723

 

$670,073

 

($3,417)

 

(15,376)

 

($669,330)

 

$131,590

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

- 5 -

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Dollars in thousands, except per share data and unless otherwise stated)

 

 

1.

The Company and Basis of Presentation

 

We are a leading provider of technology-oriented postsecondary education in the United States based on revenue and student enrollment. As of September 30, 2008, we were offering master, bachelor and associate degree programs to more than 61,000 students. As of September 30, 2008, we had 103 institutes and nine learning sites located in 36 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate and are accredited by an accrediting commission recognized by the U.S. Department of Education ("ED"). We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name. Our corporate headquarters are located in Carmel, Indiana.

 

The accompanying unaudited condensed consolidated financial statements include our wholly-owned subsidiaries' accounts and have been prepared in accordance with generally accepted accounting principles in the United States of America for interim periods and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, including significant accounting policies, normally included in a complete presentation of financial statements prepared in accordance with those principles, rules and regulations have been omitted. The Condensed Consolidated Balance Sheet as of December 31, 2007 was derived from audited financial statements but, as presented in this report, may not include all disclosures required by accounting principles generally accepted in the United States. In the opinion of our management, the financial statements contain all adjustments necessary to fairly state our financial condition and results of operations. The interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2007.

 

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, we revised the classification for losses from the sale of treasury stock. Our September 30, 2007 retained earnings balance decreased and capital surplus balance increased by $110,617 from those balances reported in our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2007 to conform to this revised classification. The revised classification did not have an effect on our total shareholders’ equity, results of operations or cash flows.

 

 

2.

Summary of Certain Accounting Policies

 

Accounts Receivable and Allowance for Doubtful Accounts. We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. The individual student balances of these receivables are insignificant. We record an allowance for doubtful accounts with respect to accounts receivable on an institute-by-institute basis. We review the historical collection experience for each institute, consider other facts and circumstances related to an institute and record an allowance for doubtful accounts based on that review and consideration.

 

Beginning in the second quarter of 2008, we have extended larger amounts of unsecured credit to our students due to a decrease in private education loans made to our students by third-party lenders. We categorized these receivables based on the credit profiles of our students and recorded an allowance for doubtful accounts based on our historical collection experience related to amounts owed by students with similar credit profiles.

 

If our collection trends were to differ significantly from our historical collection experience, we would make a corresponding adjustment to our allowance for doubtful accounts. We write off the accounts receivable due from former students when we conclude that collection is not probable.

 

- 6 -


 

Fair Value. In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for us on January 1, 2008. This pronouncement did not have any effect on our condensed consolidated financial statements, because we did not elect the fair value methodology under SFAS No. 159 for any of our financial instruments or other items that are not currently required to be measured at fair value.

 

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for financial assets and financial liabilities measured on a recurring basis. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures regarding fair value measurements. SFAS No. 157 applies whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities.

 

In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply this provision of SFAS No. 157 beginning on January 1, 2009. We do not expect it to have a material effect on our consolidated financial statements, because we do not have any nonfinancial assets or nonfinancial liabilities recognized or disclosed at fair value.

 

SFAS No. 157 defines fair value for financial reporting as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of our financial assets utilized assumptions categorized as observable inputs under SFAS No. 157. Observable inputs are assumptions based on independent market data sources.

 

The following table sets forth information regarding the fair value measurement of our financial assets as of September 30, 2008:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

As of 9/30/2008

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

Available-for-sale securities

 

$150,000

 

$150,000

 

$--

 

$--

 

We used quoted prices in active markets to value our available-for-sale securities.

 

 

3.

New Accounting Pronouncements

 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60” (“SFAS No. 163”), which clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

Also in May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 will be effective beginning November 15, 2008. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

- 7 -


 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”), which expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No. 160”), which establishes accounting and reporting standards for the noncontrolling interest of a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

Also in December 2007, the FASB revised and replaced SFAS No. 141, “Business Combinations,” with SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how a company recognizes and measures assets, liabilities and noncontrolling interests acquired or assumed in a business combination. SFAS No. 141(R) will apply to any of our business combinations or acquisitions after December 31, 2008.

 

In November 2007, FASB’s Emerging Issues Task Force (“EITF”) issued EITF 07-01, “Accounting for Collaborative Arrangements” (“EITF 07-01”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31, 2008. We have estimated the effect that the transition to a fiscal year-end measurement date will have on our pension amounts based on measurements determined for the prior fiscal year-end reporting. The change will be recorded in retained earnings in the fourth quarter of 2008 and will not have a material impact on our consolidated financial statements.

 

 

4.

Equity Compensation

 

The stock-based compensation expense and related income tax benefit recognized in our Condensed Consolidated Statements of Income in the periods indicated were as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2008

 

2007

 

2008

 

2007

Stock-based compensation expense

$1,628

 

$896

 

$5,731

 

$4,067

Income tax (benefit)

($627)

 

($345)

 

($2,206)

 

($1,565)

 

We did not capitalize any stock-based compensation cost in the three or nine months ended September 30, 2008 or 2007.

 

As of September 30, 2008, we estimated that pre-tax compensation expense for unvested stock-based compensation grants in the amount of approximately $11,687, net of estimated forfeitures, will be recognized in future periods. This expense will be recognized over the remaining service period applicable to the grantees which, on a weighted-average basis, is approximately 2.1 years.

 

- 8 -


The stock options granted, forfeited, exercised and expired in the period indicated were as follows:

 

 

 

Nine Months Ended September 30, 2008

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

 

Average

 

Aggregate

 

Average

 

Aggregate

 

 

# of

 

Exercise

 

Exercise

 

Remaining

 

Intrinsic

 

 

Shares

 

Price

 

Price

 

Contractual Term

 

Value (1)

Outstanding at beginning of period

 

1,468,993

 

$50.25

 

$73,816

 

 

 

 

Granted

 

177,543

 

$86.83

 

15,416

 

 

 

 

Forfeited

 

(3,334)

 

$61.19

 

(204)

 

 

 

 

Exercised

 

(50,725)

 

$44.77

 

(2,271)

 

 

 

 

Expired

 

(6,000)

 

$10.83

 

(65)

 

 

 

 

Outstanding at end of period

 

1,586,477

 

$54.64

 

$86,692

 

4.9 years

 

$41,670

Exercisable at end of period

 

1,247,274

 

$46.42

 

$57,893

 

4.4 years

 

$43,024

 

_____________________________

(1)   The aggregate intrinsic value of the stock options was calculated by multiplying the number of shares subject to the options outstanding or exercisable, as applicable, by the closing market price of our common stock on September 30, 2008, and subtracting the applicable aggregate exercise price.

 

The following table sets forth information regarding the stock options granted and exercised in the periods indicated:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2008

 

2007

 

2008

 

2007

Shares subject to stock options granted

--

 

--

 

177,543

 

231,362

Weighted average grant date fair value

$--

 

$--

 

$36.83

 

$29.11

Shares subject to stock options exercised

43,442

 

215,272

 

50,725

 

1,071,355

Intrinsic value of stock options exercised

$1,839

 

$16,717

 

$2,096

 

$78,117

Proceeds received from stock options exercised

$1,996

 

$6,931

 

$2,271

 

$24,472

Tax benefits realized from stock options exercised

$706

 

$6,429

 

$796

 

$30,011

 

The intrinsic value of a stock option is the difference between the fair market value of the stock and the option exercise price.

 

The fair value of each stock option grant was estimated on the date of grant using the following assumptions:

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

2008

 

2007

 

2008

 

2007

Risk-free interest rates

Not applicable

 

Not applicable

 

2.7%

 

4.5% - 4.8%

Expected lives (in years)

Not applicable

 

Not applicable

 

4.0

 

4.7

Volatility

Not applicable

 

Not applicable

 

53%

 

35%

Dividend yield

Not applicable

 

Not applicable

 

None

 

None

 
- 9 -

 

The following table sets forth the number of shares of restricted stock and the restricted stock units ("RSUs") that were granted, forfeited and vested in the period indicated:

 

 

Nine Months Ended September 30, 2008

 

# of Shares of Restricted Stock

 

Weighted Average Grant Date
Fair Value

 

# of RSUs

 

Weighted Average Grant Date
Fair Value

Unvested at beginning of period

22,672

 

$61.02

 

58,097

 

$84.40

Granted

--

 

--

 

43,419

 

81.32

Forfeited

(3,139)

 

59.93

 

(6,296)

 

84.72

Vested

--

 

--

 

--

 

--

Unvested at end of period

19,533

 

$61.19

 

95,220

 

$82.98

 

 

5.

Stock Repurchases

 

As of September 30, 2008, 3,972,100 shares remained available for repurchase under the share repurchase program (the “Repurchase Program”) authorized by our Board of Directors. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless earlier terminated by our Board of Directors, the Repurchase Program will expire when we repurchase all shares authorized for repurchase thereunder.

 

The following table sets forth information regarding the shares of our common stock that we repurchased in the periods indicated:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2008

 

2007

 

2008

 

2007

Number of shares

184,700

 

829,100

 

1,049,700

 

2,359,000

Total cost

$15,971

 

$87,316

 

$87,774

 

$228,079

Average price per share

$86.47

 

$105.31

 

$83.62

 

$96.68

 

 

6.

Debt

 

On December 17, 2007, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a single lender to borrow up to $160,000 under two revolving credit facilities: one in the maximum principal amount of $50,000; and the other in the maximum principal amount of $110,000. We can borrow under the credit facilities on either a secured or unsecured basis. The Credit Agreement matures on July 1, 2010.

 

Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”), plus an applicable margin based on our indebtedness to net worth ratio, adjusted quarterly. We pay a commitment fee of 0.15% per annum of the average daily unused amount of the credit facilities. As of September 30, 2008, the borrowings under the Credit Agreement were $150,000, all of which were secured and bore interest at a rate of 3.31% per annum. Approximately $157,950 of our investments and cash equivalents served as collateral for the secured borrowings as of September 30, 2008.

 

- 10 -


 

The following table sets forth the interest expense on our borrowings under the Credit Agreement that we recognized in the periods indicated:

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

2008

 

2007

 

2008

 

2007

$1,012

 

$2,117

 

$3,536

 

$6,248

 

 

7.

Investments

 

The following table sets forth how our investments were classified on our Condensed Consolidated Balance Sheets as of the dates indicated:

 

 

As of:

 

September 30, 2008

 

December 31, 2007

 

September 30, 2007

 

Available-for-Sale

 

Held-to-Maturity

 

Total

 

Available-for-Sale

 

Held-to-Maturity

 

Total

 

Available-for-Sale

 

Held-to-Maturity

 

Total

Short-term investments

$150,000

 

$--

 

$150,000

 

$303,360

 

$--

 

$303,360

 

$261,760

 

$--

 

$261,760

Non-current investments

--

 

--

 

--

 

--

 

--

 

--

 

- -

 

--

 

--

 

$150,000

 

$--

 

$150,000

 

$303,360

 

$--

 

$303,360

 

$261,760

 

$--

 

$261,760

 

          The following table sets forth the aggregate fair market value of our available-for-sale investments as of the dates indicated:

 

 

As of:

 

September 30, 2008

 

December 31, 2007

 

September 30, 2007

Available-for-Sale Investments:

 

 

 

 

 

Auction rate debt securities

$--

 

$130,575

 

$ 51,175

Variable rate demand notes

$150,000

 

$172,785

 

$210,585

 

$150,000

 

$303,360

 

$261,760

 

We had no material gross unrealized holding or realized gains (losses) from our investments in auction rate securities and variable rate demand notes in the three or nine months ended September 30, 2008 and 2007. All income generated from those investments was recorded as interest income. The interest income recognized from our investments in the periods indicated was as follows:

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

2008

 

2007

 

2008

 

2007

$1,563

 

$2,427

 

$4,767

 

$8,006

 

The following table sets forth the contractual maturities of our debt securities classified as available-for-sale as of September 30, 2008:

 

Contractual Maturity

 

Available-for-Sale

Due within five years

 

$ --

Due after five years through ten years

28,150

Due after ten years

 

121,850

 

 

$150,000

 

- 11 -


 

 

8.

Earnings Per Common Share

 

Earnings per common share for all periods have been calculated in conformity with SFAS No. 128, “Earnings Per Share.” This data is based on historical net income and the weighted average number of shares of our common stock outstanding during each period as set forth in the following table:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2008

 

2007

 

2008

 

2007

 

(In thousands)

Shares:

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding

38,777

 

39,958

 

38,938

 

40,437

Shares assumed issued (less shares assumed purchased for treasury)

 

 

 

 

 

 

 

for stock-based compensation

418

 

614

 

353

 

650

Outstanding shares for diluted

 

 

 

 

 

 

 

earnings per share calculation

39,195

 

40,572

 

39,291

 

41,087

 

A total of 265,825 shares at September 30, 2008 and 0 shares at September 30, 2007 were excluded from the calculation of our diluted earnings per common share because the effect was anti-dilutive.

 

 

9.

Employee Pension Benefits

 

The following table sets forth the components of net periodic pension cost (benefit) of the ESI Pension Plan and ESI Excess Pension Plan for the periods indicated:

 

 

 

Three Months

 

Nine Months

 

 

Ended September 30,

 

Ended September 30,

 

 

2008

 

2007

 

2008

 

2007

Interest cost

 

$769

 

$769

 

$2,307

 

$2,307

Expected return on assets

 

(1,307)

 

(1,202)

 

(3,921)

 

(3,606)

Recognized net actuarial loss

 

--

 

138

 

--

 

414

Net periodic pension (benefit)

 

($538)

 

($295)

 

($1,614)

 

($885)

 

The benefit accruals under the ESI Pension Plan and ESI Excess Pension Plan were frozen effective March 31, 2006. As a result, no service cost or amortization of prior service cost have been included in the net periodic pension benefit.

 

We made no contributions to the ESI Pension Plan during the three or nine months ended September 30, 2008 and 2007. We do not expect to make any contributions to the ESI Pension Plan in 2008.

 

 

10.

Contingencies

 

As part of our normal operations, one of our insurers issues surety bonds for us that are required by various education authorities that regulate us. We are obligated to reimburse our insurer for any of those surety bonds that are paid by the insurer. As of September 30, 2008, the total face amount of those surety bonds was approximately $19,464.

 

We are also subject to various claims and contingencies in the ordinary course of our business, including those related to litigation, business transactions, employee-related matters and taxes, among others. We cannot assure you of the ultimate outcome of any litigation involving us. Any litigation alleging violations of education or consumer protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

 

- 12 -


 

Guarantees. In October 2007, we entered into a risk sharing agreement (“RSA”) with an unaffiliated lender for private education loans to be provided to our students by or through that lender to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover. Under the RSA, if more than a certain percentage of the private education loans, based on dollar volume, are charged off by the lender, we guarantee the repayment of any private education loans that the lender charges off above that percentage. Our obligations under the RSA will remain in effect until all private education loans made under the RSA are paid in full or charged off by the lender. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the RSA that we pay to the lender pursuant to our guarantee obligation. The RSA was terminated effective February 22, 2008, such that no private education loans have been made under the RSA after that date.

 

The RSA requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured as of December 31 in each year. If we are not in compliance with those ratios at any measurement date, we are obligated to provide the lender with a letter of credit in an amount based on a percentage of the outstanding private education loans under the RSA that have not been paid in full or charged off from time to time.

 

The maximum potential future payments that we could be required to make pursuant to our guarantee obligation under the RSA are affected by:

 

 

the amount of the private education loans made under the RSA;

 

the fact that those loans consist of a large number of loans of individually immaterial amounts;

 

the interest and fees associated with those loans;

 

the repayment performance of those loans; and

 

when during the life of those loans they are charged off.

 

As a result, we are not able to estimate the undiscounted maximum potential future payments that we could be required to make under the RSA. Our recorded liability related to the RSA as of September 30, 2008 was not material.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

All statements, trend analyses and other information contained in this report that are not historical facts are forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Exchange Act. Forward-looking statements are made based on our management’s current expectations and beliefs concerning future developments and their potential effects on us. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions. Forward-looking statements involve risks and uncertainties and do not guarantee future performance. We cannot assure you that future developments affecting us will be those anticipated by our management. Among the factors that could cause actual results to differ materially from those expressed in our forward-looking statements 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 accreditation standards, or the interpretation or enforcement of those regulations, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students;

 

our failure to comply with the extensive education laws and regulations and accreditation standards that we are subject to;

 

effects of any change in our ownership resulting in a change in control, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of our institutes;

 

our ability to implement our growth strategies;

 

our failure to maintain or renew required regulatory authorizations or accreditation of our institutes;

 

- 13 -


 

receptivity of students and employers to our existing program offerings and new curricula;

 

loss of access by our students to lenders for education loans;

 

our ability to collect internally funded financing from our students; and

 

our ability to successfully defend litigation and other claims brought against us.

 

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC and those discussed in Part II, Item 1A. “Risk Factors.” of our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2008 and this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

 

Overview

 

 

You should keep in mind the following points as you read this report:

 

 

References in this document to “we,” “us,” “our” and “ITT/ESI” refer to ITT Educational Services, Inc. and its subsidiaries.

 

The terms “ITT Technical Institute” or “institute” (in singular or plural form) refer to an individual school owned and operated by ITT/ESI, including its learning sites, if any. The terms “institution” or “campus group” (in singular or plural form) mean a main campus and its additional locations, branch campuses and/or learning sites, if any.

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC for discussion of, among other matters, the following items:

 

 

cash receipts from financial aid programs;

 

nature of capital additions;

 

seasonality of revenue;

 

components of income statement captions;

 

federal regulations regarding:

 

timing of receipt of funds from the federal student financial aid programs under Title IV (the “Title IV Programs”) of the Higher Education Act of 1965, as amended (the “HEA”);

 

percentage of applicable revenue that may be derived from the Title IV Programs;

 

return of Title IV Program funds for withdrawn students; and

 

default rates;

 

private education loans;

 

investments; and

 

repurchase of shares of our common stock.

 

This management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses, and contingent assets and liabilities. Actual results may differ from those estimates and judgments under different assumptions or conditions.

 

 

- 14 -

 


Background

 

We are a leading provider of technology-oriented postsecondary education programs in the United States based on revenue and student enrollment. As of September 30, 2008, we were offering master, bachelor and associate degree programs to more than 61,000 students. As of September 30, 2008, we had 103 institutes and nine learning sites of those institutes located in 36 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate, and are accredited by an accrediting commission recognized by the ED. We design our education programs, after consultation with employers, to help graduates prepare for careers in various fields involving their areas of study. We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name.

 

In the third quarter of 2008, we began operations at one new institute. We plan to begin operations at up to two additional locations in 2008. Our overall expansion plans include:

 

 

operating new institutes;

 

adding learning sites to existing institutes;

 

offering a broader range of both residence and online programs at our existing institutes; and

 

increasing the number of our institutes that offer bachelor degree programs.

 

Critical Accounting Policies and Estimates

 

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses, and contingent assets and liabilities. Actual results may differ from those estimates and judgments under different assumptions or conditions. We have discussed the critical accounting policies that we believe affect our more significant estimates and judgments used in the preparation of our consolidated financial statements in the "Management's Discussion and Analysis of Financial Condition and Results of the Operations – Critical Accounting Policies and Estimates" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments, except as discussed below.

 

Accounts Receivable and Allowance for Doubtful Accounts. We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. The individual student balances of these receivables are insignificant. We record an allowance for doubtful accounts with respect to accounts receivable on an institute-by-institute basis. We review the historical collection experience for each institute, consider other facts and circumstances related to an institute and record an allowance for doubtful accounts based on that review and consideration.

 

Beginning in the second quarter of 2008, we have extended larger amounts of unsecured credit to our students due to a decrease in private education loans made to our students by third-party lenders. We categorized these receivables based on the credit profiles of our students and recorded an allowance for doubtful accounts based on our historical collection experience related to amounts owed by students with similar credit profiles.

 

If our collection trends were to differ significantly from our historical collection experience, we would make a corresponding adjustment to our allowance for doubtful accounts. We write off the accounts receivable due from former students when we conclude that collection is not probable.

 

Fair Value. Effective January 1, 2008, we adopted SFAS No. 157 for financial assets and financial liabilities measured on a recurring basis. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures regarding fair value measurements. SFAS No. 157 applies whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities.

 

In February 2008, the FASB issued FSP No. 157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply this provision of SFAS No. 157 beginning on January 1, 2009. We do not expect it to have a material effect on our consolidated financial statements, because we do not have any nonfinancial assets or nonfinancial liabilities recognized or disclosed at fair value.

 

- 15 -


 

SFAS No. 157 defines fair value for financial reporting as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of our financial assets utilized assumptions categorized as observable inputs under SFAS No. 157. Observable inputs are assumptions based on independent market data sources.

 

The following table sets forth information regarding the fair value measurement of our financial assets as of September 30, 2008:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

As of 9/30/2008

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

(In thousands)

 

 

Available-for-sale securities

 

$150,000

 

$150,000

 

$--

 

$--

 

We used quoted prices in active markets to value our available-for-sale securities.

 

New Accounting Pronouncements

 

In May 2008, the FASB issued SFAS No. 163, which clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

Also in May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 will be effective beginning November 15, 2008. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for us on January 1, 2008. This pronouncement did not have any effect on our condensed consolidated financial statements, because we did not elect the fair value methodology under SFAS No. 159 for any of our financial instruments or other items that are not currently required to be measured at fair value.

 

In March 2008, the FASB issued SFAS No. 161, which expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160, which establishes accounting and reporting standards for the noncontrolling interest of a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

 

Also in December 2007, the FASB revised and replaced SFAS No. 141 with SFAS No. 141(R), which establishes principles and requirements for how a company recognizes and measures assets, liabilities and noncontrolling interests acquired or assumed in a business combination. SFAS No. 141(R) will apply to any of our business combinations or acquisitions after December 31, 2008.

 

- 16 -


 

In November 2007, FASB’s EITF issued EITF 07-01, which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 158, which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31, 2008. We have estimated the effect that the transition to a fiscal year-end measurement date will have on our pension amounts based on measurements determined for the prior fiscal year-end reporting. The change will be recorded in retained earnings in the fourth quarter of 2008 and will not have a material impact on our consolidated financial statements.

 

Results of Operations

 

The following table sets forth the percentage relationship of certain statement of income data to revenue for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2008

 

2007

 

2008

 

2007

Revenue

100.0%

 

100.0%

 

100.0%

 

100.0%

Cost of educational services

37.4%

 

40.7%

 

38.4%

 

42.3%

Student services and administrative expenses

30.8%

 

30.4%

 

30.9%

 

31.9%

Operating income

31.8%

 

28.9%

 

30.7%

 

25.8%

Interest income, net

0.2%

 

0.1%

 

0.2%

 

0.3%

Income before provision for income taxes

32.0%

 

29.0%

 

30.9%

 

26.1%

 

The following table sets forth our total student enrollment as of the dates indicated:

 

 

 

2008

 

2007

 

 

Total

 

Increase

 

Total

 

Increase

Total Student

 

Student

 

Over

 

Student

 

Over

Enrollment as of:

 

Enrollment

 

Prior Year

 

Enrollment

 

Prior Year

March 31

 

54,194

 

9.9%

 

49,295

 

12.4%

June 30

 

54,793

 

12.1%

 

48,873

 

11.0%

September 30

 

61,556

 

14.7%

 

53,675

 

11.5%

December 31

 

Not applicable

 

Not applicable

 

53,027

 

13.1%

 

Total student enrollment includes all new and continuing students. A continuing student is any student who, in the academic quarter being measured, is enrolled in a program of study at an ITT Technical Institute and was enrolled in the same program at any ITT Technical Institute at the end of the immediately preceding academic quarter. A new student is any student who, in the academic quarter being measured, enrolls in and begins attending any program of study at an ITT Technical Institute:

 

 

for the first time at that institute;

 

after graduating in a prior academic quarter from a different program of study at that institute; or

 

after having withdrawn or been terminated from a program of study at that institute.

 

- 17 -


The following table sets forth our new student enrollment in the periods indicated:

 

 

 

2008

 

2007

New Student Enrollment

 

New

 

Increase

 

New

 

Increase

in the Three

 

Student

 

Over

 

Student

 

Over

Months Ended:

 

Enrollment

 

Prior Year

 

Enrollment

 

Prior Year

March 31

 

13,844

 

8.7%

 

12,738

 

13.1%

June 30

 

14,751

 

22.5%

 

12,043

 

3.2%

September 30

 

21,807

 

19.4%

 

18,270

 

8.8%

December 31

 

Not applicable

 

Not applicable

 

11,542

 

13.1%

Total for the year

 

Not applicable

 

Not applicable

 

54,593

 

9.3%

 

We generally organize the academic schedule for programs of study offered at our institutes on the basis of four 12-week academic quarters in a calendar year that typically begin in early March, mid-June, early September and late November or early December. To measure the persistence of our students, the number of continuing students in any academic quarter is divided by the total student enrollment in the immediately preceding academic quarter.

 

The following table sets forth the rates of our students’ persistence for the periods indicated:

 

 

 

Student Persistence for the Three Months Ended:

Year

 

March 31

 

June 30

 

September 30

 

December 31

2006

 

75.8%

 

73.7%

 

71.2%

 

 

76.2%

2007

 

78.0%

 

74.7%

 

72.4%

 

 

77.3%

2008

 

76.1%

 

73.9%

 

72.5%

 

 

Not applicable

 

Changes that we made to how we deliver certain program courses, primarily those courses taught either entirely or partially online over the Internet, have impacted our students’ persistence over the past several years.  Student retention is typically lower in the courses that we teach online over the Internet compared to the courses that we teach in residence on campus. Our students’ persistence decreased as a result of teaching certain courses online over the Internet.  In the second quarter of 2006, we began modifying the academic qualifications for students to take online courses, which led to year-over-year improvements in persistence in each quarter of 2007 as compared to 2006.  The decrease in the student persistence rate in the first quarter of 2008 compared to the same period in 2007 was primarily due to a change in our 2008 academic calendar, which eliminated a break in classes in the first quarter of 2008 compared to the first quarter of 2007.  We believe that this change in the academic calendar resulted in approximately 500 additional student withdrawals occurring in the first quarter of 2008 than would have occurred if we had not changed the academic calendar. The decrease in the student persistence rate in the three months ended June 30, 2008 compared to the same period in 2007 was primarily due to a higher number of students who graduated at the end of the March 2008 academic quarter compared to the end of the March 2007 academic quarter.

 

Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007.   Revenue increased $36.3 million, or 16.7%, to $254.3 million in the three months ended September 30, 2008 compared to $217.9 million in the three months ended September 30, 2007, primarily due to:

 

 

a 12.1% increase in total student enrollment at June 30, 2008 compared to June 30, 2007; and

 

a 5.0% increase in tuition rates in March 2008.

 

The increase in student enrollment was primarily due to:

 

 

student enrollment growth in programs of study and at locations that were in existence prior to 2007;

 

new programs of study offered by our institutes; and

 

operating new institutes.

 

- 18 -


 

Cost of educational services increased $6.2 million, or 7.0%, to $95.0 million in the three months ended September 30, 2008 compared to $88.8 million in the three months ended September 30, 2007, primarily due to:

 

 

increased costs associated with operating new institutes and learning sites; and

 

the costs required to service the increased total student enrollment.

 

The increase in cost of educational services was partially offset by:

 

 

greater efficiencies in the operation of our institutes; and

 

decreased costs associated with decreased sales of laptop computers.

 

Cost of educational services as a percentage of revenue decreased 330 basis points to 37.4% in the three months ended September 30, 2008 compared to 40.7% in the three months ended September 30, 2007, primarily due to greater efficiencies in the operation of our institutes. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new institutes.

 

Student services and administrative expenses increased $12.3 million, or 18.6%, to $78.5 million in the three months ended September 30, 2008 compared to $66.2 million in the three months ended September 30, 2007. The principal causes of this increase included:

 

 

an increase in bad debt expense associated with increases in internally funded student financing;

 

an increase in media advertising costs; and

 

an increase in compensation and benefit costs associated with a greater number of employees.

 

Student services and administrative expenses increased to 30.8% of revenue in the three months ended September 30, 2008 compared to 30.4% of revenue in the three months ended September 30, 2007, primarily due to an increase in bad debt expense. The increase in student services and administrative expenses as a percentage of revenue was partially offset by media advertising costs and compensation and benefit costs increasing at a lower rate than the increase in revenue. Bad debt expense as a percentage of revenue increased to 5.0% in the three months ended September 30, 2008 compared to 1.8% in the three months ended September 30, 2007. We believe that our bad debt expense as a percentage of revenue could increase further during the remainder of 2008, primarily due to increases in internally funded student financing.

 

Operating income increased $17.8 million, or 28.4%, to $80.8 million in the three months ended September 30, 2008 compared to $62.9 million in the three months ended September 30, 2007. The operating margin increased to 31.8% in the three months ended September 30, 2008 compared to 28.9% in the three months ended September 30, 2007.

 

Interest income decreased $0.9 million, or 35.7%, to $1.6 million in the three months ended September 30, 2008 compared to $2.4 million in the three months ended September 30, 2007, primarily due to a decrease in investment returns in the overall market and a more conservative investment strategy. Interest expense decreased $1.1 million, or 52.3%, to $1.0 million in the three months ended September 30, 2008 compared to $2.1 million in the three months ended September 30, 2007, primarily due to a decrease in the effective interest rate on our revolving credit facilities.

 

Our combined federal and state effective income tax rate was 38.3% in the three months ended September 30, 2008 compared to 37.3% in the three months ended September 30, 2007. The increase in our combined federal and state effective income tax rate was primarily due to less tax-exempt interest income and certain expenses that were not deductible for income tax purposes.

 

Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 30, 2007.   Revenue increased $96.4 million, or 15.1%, to $735.5 million in the nine months ended September 30, 2008 compared to $639.1 million in the nine months ended September 30, 2007, primarily due to:

 

- 19 -


 

 

a 5.0% increase in tuition rates in March 2008 and March 2007;

 

a 12.1% increase in total student enrollment at June 30, 2008 compared to June 30, 2007;

 

a 9.9% increase in total student enrollment at March 31, 2008 compared to March 31, 2007; and

 

a 13.1% increase in total student enrollment at December 31, 2007 compared to December 31, 2006.

 

The increase in student enrollment was primarily due to:

 

 

student enrollment growth in programs of study and at locations that were in existence prior to 2007;

 

new programs of study offered by our institutes; and