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 June 30, 2009

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

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

 

incorporation or organization)

 

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

Yes o

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

 

37,707,809

Number of shares of Common Stock, $.01 par value, outstanding at June 30, 2009

 

 

 

 

ITT EDUCATIONAL SERVICES, INC.

Carmel, Indiana

 

Quarterly Report to Securities and Exchange Commission

June 30, 2009

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

Index

 

 

Condensed Consolidated Balance Sheets as of June 30, 2009 and 2008 (unaudited) and

December 31, 2008

 

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

June 30, 2009 and 2008

 

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

June 30, 2009 and 2008

 

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

June 30, 2009 and 2008 (unaudited) and the year ended December 31, 2008

 

Notes to Condensed Consolidated Financial Statements

 

 

- 1 -

 

 

 

 

ITT EDUCATIONAL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

 

 

 

As of

 

 

 

June 30, 2009

 

December 31, 2008

 

June 30, 2008

 

(unaudited)

 

 

 

(unaudited)

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$140,204

 

$226,255

 

$78,691

Short-term investments

144,500

 

138,709

 

170,500

Restricted cash

72

 

10,405

 

200

Accounts receivable, net

69,747

 

29,779

 

29,198

Deferred income taxes

14,132

 

12,104

 

11,776

Prepaid expenses and other current assets

15,978

 

13,793

 

10,571

Total current assets

384,633

 

431,045

 

300,936

 

 

 

 

 

 

Property and equipment, net

194,046

 

166,671

 

162,987

Direct marketing costs, net

25,988

 

22,973

 

21,963

Other assets

20,235

 

3,170

 

18,675

Total assets

$624,902

 

$623,859

 

$504,561

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$62,420

 

$54,815

 

$54,409

Accrued compensation and benefits

21,016

 

21,133

 

20,823

Accrued income taxes

11,742

 

14,976

 

5,443

Other accrued liabilities

15,464

 

11,423

 

13,198

Deferred revenue

126,878

 

162,206

 

138,338

Total current liabilities

237,520

 

264,553

 

232,211

 

 

 

 

 

 

Long-term debt

150,000

 

150,000

 

150,000

Deferred income taxes

167

 

1,504

 

10,818

Other liabilities

21,948

 

19,951

 

18,486

Total liabilities

409,635

 

436,008

 

411,515

 

 

 

 

 

 

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

147,369

 

135,655

 

131,389

Retained earnings

858,333

 

732,107

 

620,901

Accumulated other comprehensive (loss)

(12,868)

 

(13,384)

 

(3,417)

Treasury stock, 16,361,095, 15,352,376

 

 

 

 

 

and 15,235,461 shares, at cost

(778,108)

 

(667,068)

 

(656,368)

Total shareholders’ equity

215,267

 

187,851

 

93,046

Total liabilities and shareholders’ equity

$624,902

 

$623,859

 

$504,561

 

 

 

 

 

 

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

 

Six Months Ended

 

June 30,

 

June 30,

 

2009

 

2008

 

2009

 

2008

Revenue

$317,140

 

$246,411

 

$605,173

 

$481,261

Costs and expenses:

 

 

 

 

 

 

 

Cost of educational services

110,792

 

95,183

 

211,879

 

187,208

Student services and administrative expenses

89,056

 

74,910

 

175,857

 

149,036

Total costs and expenses

199,848

 

170,093

 

387,736

 

336,244

Operating income

117,292

 

76,318

 

217,437

 

145,017

Interest income

878

 

1,177

 

2,111

 

3,210

Interest (expense)

(208)

 

(1,057)

 

(402)

 

(2,576)

Income before provision for income taxes

117,962

 

76,438

 

219,146

 

145,651

Provision for income taxes

46,039

 

29,307

 

85,294

 

55,888

Net income

$71,923

 

$47,131

 

$133,852

 

$89,763

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Basic

$1.89

 

$1.21

 

$3.50

 

$2.30

Diluted

$1.87

 

$1.20

 

$3.45

 

$2.28

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

37,981

 

38,842

 

38,268

 

39,020

Diluted

38,425

 

39,167

 

38,742

 

39,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

June 30,

 

June 30,

 

2009

 

2008

 

2009

 

2008

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

$71,923

 

$47,131

 

$133,852

 

$89,763

Adjustments to reconcile net income to net cash flows

 

 

 

 

 

 

 

from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

6,156

 

5,763

 

11,928

 

11,257

Provision for doubtful accounts

18,620

 

9,685

 

32,829

 

16,618

Deferred income taxes

(2,773)

 

(3,666)

 

(3,815)

 

(5,303)

Excess tax benefit from stock option exercises

(94)

 

(54)

 

(3,887)

 

(87)

Stock-based compensation expense

3,173

 

1,928

 

7,356

 

4,103

Other

(557)

 

--

 

(422)

 

--

Changes in operating assets and liabilities, net of
acquisition:

 

 

 

 

 

 

 

Restricted cash

(1,808)

 

(159)

 

8,324

 

5,858

Accounts receivable

(36,057)

 

(23,811)

 

(72,000)

 

(30,684)

Direct marketing costs, net

(1,357)

 

(659)

 

(3,015)

 

(1,396)

Accounts payable

(2,787)

 

(2,395)

 

6,056

 

9,286

Accrued income taxes

(25,025)

 

(18,626)

 

1,124

 

(485)

Other operating assets and liabilities

(97)

 

2,160

 

1,384

 

6,882

Deferred revenue

(7,887)

 

(65,310)

 

(36,956)

 

(74,789)

Net cash flows from operating activities

21,430

 

(48,013)

 

82,758

 

31,023

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Facility expenditures and land purchases

(778)

 

(6,896)

 

(1,852)

 

(13,189)

Capital expenditures, net

(7,398)

 

(5,286)

 

(12,006)

 

(7,790)

Acquisition of college, net of cash acquired

(20,792)

 

--

 

(20,792)

 

--

Proceeds from sales and maturities of investments

36,791

 

180,430

 

85,389

 

471,805

Purchase of investments

(35,049)

 

(138,845)

 

(90,819)

 

(338,945)

Issuance of note receivable

(13,920)

 

--

 

(13,920)

 

--

Net cash flows from investing activities

(41,146)

 

29,403

 

(54,000)

 

111,881

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Excess tax benefit from stock option exercises

94

 

54

 

3,887

 

87

Proceeds from exercise of stock options

171

 

234

 

5,994

 

275

Repurchase of common stock and shares tendered for taxes

(59,987)

 

--

 

(124,690)

 

(71,803)

Net cash flows from financing activities

(59,722)

 

288

 

(114,809)

 

(71,441)

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

(79,438)

 

(18,322)

 

(86,051)

 

71,463

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

219,642

 

97,013

 

226,255

 

7,228

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$140,204

 

$78,691

 

$140,204

 

$78,691

 

 

 

 

 

 

 

 

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, 2007

54,069

 

$541

 

$127,017

 

$531,363

 

($3,417)

 

(14,375)

 

($584,946)

 

$70,558

For the six months ended June 30, 2008 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

89,763

 

 

 

 

 

 

 

89,763

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89,763

Exercise of stock options

 

 

 

 

 

 

(200)

 

 

 

7

 

475

 

275

Tax benefit from exercise of stock options

 

 

 

 

90

 

 

 

 

 

 

 

 

 

90

Stock-based compensation

 

 

 

 

4,103

 

 

 

 

 

 

 

 

 

4,103

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(865)

 

(71,803)

 

(71,803)

Issuance of shares for Directors’ compensation

 

 

 

 

 

 

(25)

 

 

 

1

 

85

 

60

Restricted stock cancellations

 

 

 

 

179

 

 

 

 

 

(3)

 

(179)

 

--

Balance as of June 30, 2008

54,069

 

541

 

131,389

 

620,901

 

(3,417)

 

(15,235)

 

(656,368)

 

93,046

For the six months ended December 31, 2008 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

113,209

 

 

 

 

 

 

 

113,209

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost, net of income tax

 

 

 

 

 

 

 

 

17

 

 

 

 

 

17

Net actuarial pension loss, net of income tax

 

 

 

 

 

 

 

 

(11,212)

 

 

 

 

 

(11,212)

Pension settlement loss, net of income tax

 

 

 

 

 

 

 

 

928

 

 

 

 

 

928

Unrealized gain

 

 

 

 

 

 

 

 

428

 

 

 

 

 

428

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,370

Prior service costs, net of income tax

 

 

 

 

 

 

 

 

(128)

 

 

 

 

 

(128)

Adoption of SFAS No. 158 change in pension measurement date, net
          of income tax

 

 

 

 

 

 

325

 

 

 

 

 

 

 

325

Exercise of stock options

 

 

 

 

 

 

(2,328)

 

 

 

68

 

5,294

 

2,966

Tax benefit from exercise of stock options

 

 

 

 

1,111

 

 

 

 

 

 

 

 

 

1,111

Stock-based compensation

 

 

 

 

3,132

 

 

 

 

 

 

 

 

 

3,132

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(185)

 

(15,971)

 

(15,971)

Restricted stock cancellations

 

 

 

 

23

 

 

 

 

 

 

 

(23)

 

--

Balance as of December 31, 2008

54,069

 

541

 

135,655

 

732,107

 

(13,384)

 

(15,352)

 

(667,068)

 

187,851

For the six months ended June 30, 2009 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

133,852

 

 

 

 

 

 

 

133,852

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost, net of income tax

 

 

 

 

 

 

 

 

8

 

 

 

 

 

8

Amortization of net actuarial pension loss, net of income tax

 

 

 

 

 

 

 

 

688

 

 

 

 

 

688

Unrealized (loss)

 

 

 

 

 

 

 

 

(180)

 

 

 

 

 

(180)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134,368

Exercise of stock options

 

 

 

 

 

 

(7,628)

 

 

 

144

 

13,622

 

5,994

Tax benefit from exercise of stock options and restricted stock vesting

 

 

 

 

4,358

 

 

 

 

 

 

 

 

 

4,358

Stock-based compensation

 

 

 

 

7,356

 

 

 

 

 

 

 

 

 

7,356

Common shares repurchased

 

 

 

 

 

 

 

 

 

 

(1,150)

 

(124,336)

 

(124,336)

Issuance of shares for Directors’ compensation

 

 

 

 

 

 

2

 

 

 

1

 

28

 

30

Restricted stock shares withheld for taxes

 

 

 

 

 

 

 

 

 

 

(4)

 

(354)

 

(354)

Balance as of June 30, 2009

54,069

 

$541

 

$147,369

 

$858,333

 

($12,868)

 

(16,361)

 

($778,108)

 

$215,267

 

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

 

- 5 -

 

 

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(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 June 30, 2009, we were offering master, bachelor and associate degree programs to more than 69,000 students at ITT Technical Institute and Daniel Webster College (“DWC”) locations. As of June 30, 2009, we had 117 locations (including 108 campuses and nine learning sites) in 38 states. All of our locations 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 and since June 2009 under the “Daniel Webster College” 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, 2008 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. Arrangements where we may have a variable interest in another party are evaluated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), to determine whether we would be required to include the financial results of the other party in our consolidated financial statements. As of June 30, 2009, we were not required to include the financial results of any variable interest entity in our condensed consolidated financial statements.

 

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, 2008.

 

2.

Acquisition

 

On June 10, 2009, we acquired substantially all of the assets and assumed certain liabilities of DWC for approximately $20,800 in cash, net of cash acquired. Approximately $20,600 of the amount we paid was used to satisfy certain liabilities of DWC that we did not assume in the acquisition. DWC’s campus is located in Nashua, New Hampshire. DWC is authorized by the New Hampshire Postsecondary Education Commission and is accredited by the Commission on Institutions of Higher Education of the New England Association of Schools and Colleges. DWC currently offers programs of study at the master, bachelor and associate degree levels both in residence and through distance education.

 

Our condensed consolidated financial statements include the results of operations of DWC from the acquisition date. The revenue and expenses of DWC included in our Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009 were not material. Our revenue, net income and earnings per share would not have been materially affected, if the revenue and expenses of DWC were presented for the three and six months ended June 30, 2009 and 2008 as if the transaction had occurred at the beginning of each of those reporting periods.

 

The acquisition of DWC has been accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which requires the use of the acquisition method of accounting for all business combinations. The purchase price has been preliminarily allocated to identifiable net assets, with the excess of the estimated fair value of the net assets acquired over the consideration paid recognized as a gain. The gain was not material and has been recorded in “Student services and administrative expenses” in our Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009.

 

The following table sets forth the estimated fair values allocated to the major classes of assets acquired and liabilities assumed in the DWC acquisition as of the acquisition date:

 

 

Assets Acquired

 

Liabilities Assumed

Cash and other current assets

$1,215

 

 

Land, buildings, furniture and equipment

25,445

 

 

Intangibles

870

 

 

Accounts payable and other liabilities

 

 

$5,621

 

$27,530

 

$5,621

 

 

- 6 -

 

 

 

These estimated fair values of assets acquired and liabilities assumed in the DWC acquisition are preliminary and are based on information that was available as of the acquisition date and as of June 30, 2009. The allocation of the purchase price may be revised when we complete the final review of information. We expect to finalize the purchase price allocation by September 30, 2009.

 

3.

New Accounting Pronouncements

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance became effective for us beginning with our second fiscal quarter of 2009. We performed an evaluation of subsequent events through July 22, 2009, and we issued our financial statements on July 23, 2009.

 

See Notes 4 and 8 for a discussion of additional new accounting pronouncements that became effective for us beginning with our second fiscal quarter of 2009.

 

The following new accounting pronouncements became effective for us beginning with our first fiscal quarter of 2009:

 

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

Emerging Issues Task Force 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. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS No. 168”), which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”) and establishes the FASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The Codification will be effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our third fiscal quarter of 2009, all references made by us to GAAP in our consolidated financial statements will use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not expected to have any impact on our consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), which amends certain requirements of FIN 46(R) to improve the financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This pronouncement is effective for our interim and annual reporting periods beginning January 1, 2010. We have not determined the effect that the adoption of this pronouncement will have on our condensed consolidated financial statements and disclosures.

 

Also in June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS No. 166”), which provides guidance to improve transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. It also clarifies the requirement for isolation and limitations on portions of financial assets that are eligible for sale accounting, eliminates exceptions for qualifying special-purpose entities from the consolidation guidance and eliminates the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the financial assets. This pronouncement is effective for our

 

- 7 -

 

 

interim and annual reporting periods beginning January 1, 2010. We have not determined the effect that the adoption of this pronouncement will have on our condensed consolidated financial statements and disclosures.

 

In December 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”), which requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. These disclosures are intended to provide users of financial statements with a greater understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. FSP No. 132(R)-1 will apply to our plan asset disclosures beginning with our fiscal year ending December 31, 2009.

 

4.

Fair Value

 

In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”), which delayed the effective date of SFAS No. 157, “Fair Value Measurements” (“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. This provision of SFAS No. 157 was effective for us beginning on January 1, 2009. The adoption of this guidance did not have a material impact on our condensed 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.

 

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”), which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance became effective for us beginning with our disclosures for our second fiscal quarter of 2009. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or disclosures.

 

The following table sets forth information regarding the fair value measurement of our financial assets as of June 30, 2009:

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

Description

 

As of
June 30, 2009

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

Cash equivalents

 

$130,125

 

$130,125

 

$--

 

$--

Short-term investments

 

144,500

 

69,098

 

75,402

 

--

 

 

$274,625

 

$199,223

 

$75,402

 

$--

 

We used quoted prices in active markets for identical assets as of the measurement date to value our financial assets that were categorized as Level 1. For assets that were categorized as Level 2, we used:

 

quoted prices for similar assets in active markets;

quoted prices for identical or similar assets in markets that were not active or in which little public information had been released;

inputs other than quoted prices that were observable for the assets; or

 

inputs that were principally derived from or corroborated by observable market data by correlation or other means.

 

In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board Opinion (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1 and APB 28-1”), which requires disclosures about fair value of financial instruments for interim reporting periods. This guidance became effective for us beginning with our disclosures for our second fiscal quarter of 2009.

 

The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued liabilities and deferred revenue approximate fair value because of the immediate or short-term maturity of these financial instruments. Investments classified as available-for-sale are recorded at their market value.

 

The fair value of a note receivable included in Other assets on our Condensed Consolidated Balance Sheet as of June 30, 2009 is estimated by discounting the future cash flows using current rates for similar arrangements. As of June 30, 2009, each of the carrying value and the estimated fair value of the note receivable was $13,920.

 

 

- 8 -

 

 

 

The fair value of our long-term debt is estimated by discounting the future cash flows using current rates for similar loans with similar characteristics and remaining maturities. As of June 30, 2009, the carrying value of our long-term debt was $150,000 and the estimated fair value was approximately $149,000.

 

5.

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
June 30,

 

Six Months Ended
June 30,

 

2009

 

2008

 

2009

 

2008

Stock-based compensation expense

$3,173

 

$1,928

 

$7,356

 

$4,103

Income tax (benefit)

($1,222)

 

($742)

 

($2,833)

 

($1,579)

 

We did not capitalize any stock-based compensation cost in the three or six months ended June 30, 2009 or 2008.

 

As of June 30, 2009, we estimated that pre-tax compensation expense for unvested stock-based compensation grants in the amount of approximately $20,087, 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 2.2 years.

 

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

 

 

 

Six Months Ended June 30, 2009

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

 

Average

 

Aggregate

 

Average

 

Aggregate

 

 

# of

 

Exercise

 

Exercise

 

Remaining

 

Intrinsic

 

 

Shares

 

Price

 

Price

 

Contractual Term

 

Value (1)

Outstanding at beginning of period

 

1,561,517

 

$54.89

 

$85,710

 

 

 

 

Granted

 

258,000

 

$121.56

 

31,362

 

 

 

 

Forfeited

 

--

 

$--

 

--

 

 

 

 

Exercised

 

(143,894)

 

$41.66

 

(5,994)

 

 

 

 

Expired

 

--

 

$--

 

--

 

 

 

 

Outstanding at end of period

 

1,675,623

 

$66.29

 

$111,078

 

4.9 years

 

$57,590

Exercisable at end of period

 

1,218,175

 

$51.38

 

$62,584

 

4.0 years

 

$60,037

 

_____________________________

(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 June 30, 2009, 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
June 30,

 

Six Months Ended
June 30,

 

2009

 

2008

 

2009

 

2008

Shares subject to stock options granted

--

 

15,000

 

258,000

 

177,543

Weighted average grant date fair value

$--

 

$29.71

 

$54.05

 

$36.83

Shares subject to stock options exercised

4,450

 

5,583

 

143,894

 

7,283

Intrinsic value of stock options exercised

$259

 

$171

 

$10,969

 

$257

Proceeds received from stock options exercised

$171

 

$234

 

$5,994

 

$275

Tax benefits realized from stock options exercised

$100

 

$57

 

$4,070

 

$90

 

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 June 30,

 

Six Months
Ended June 30,

 

2009

 

2008

 

2009

 

2008

Risk-free interest rates

Not applicable

 

2.7%

 

1.6%

 

2.7%

Expected lives (in years)

Not applicable

 

4.0

 

4.5

 

4.0

Volatility

Not applicable

 

53%

 

54%

 

53%

Dividend yield

Not applicable

 

None

 

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:

 

 

Six Months Ended June 30, 2009

 

# of Shares of Restricted Stock

 

Weighted Average Grant Date
Fair Value

 

# of RSUs

 

Weighted Average Grant Date
Fair Value

Unvested at beginning of period

19,440

 

$61.05

 

95,079

 

$82.95

Granted

--

 

--

 

36,477

 

116.66

Forfeited

--

 

--

 

(3,626)

 

92.08

Vested

(19,301)

 

61.01

 

--

 

--

Unvested at end of period

139

 

$66.66

 

127,930

 

$92.30

 

The total fair market value of the shares vested during the six months ended June 30, 2009 was $1,924.

 

6.

Stock Repurchases

 

As of June 30, 2009, 2,822,067 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
June 30,

 

Six Months Ended
June 30,

 

2009

 


2008

 

2009

 


2008

Number of shares

622,200

 

--

 

1,150,033

 

865,000

Total cost

$59,976

 

$--

 

$124,336

 

$71,803

Average cost per share

$96.39

 

$--

 

$108.11

 

$83.01

 

7.

Debt

 

We are a party to an Amended and Restated Credit Agreement dated as of December 17, 2007 and amended as of March 19, 2009 (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. Both revolving credit facilities under the Credit Agreement mature 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 June 30, 2009, the borrowings under the Credit Agreement were $150,000, all of which were secured and bore interest at a rate of 0.44% per annum. Approximately $157,950 of our investments and cash equivalents served as collateral for the secured borrowings as of June 30, 2009.

 

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
June 30,

 

Six Months Ended
June 30,

2009

 


2008

 

2009

 


2008

$206

 

$1,057

 

$395

 

$2,524

 

8.

Investments

 

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and 124-2”), which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance became effective for us beginning with our disclosures for our second fiscal quarter of 2009. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or disclosures because we did not hold any investments at June 30, 2009 that were impaired.

 

 

- 10 -

 

 

 

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

 

 

As of:

 

June 30, 2009

 

December 31, 2008

 

June 30, 2008

 

Available-for-Sale

 

Held-to-Maturity

 

Total

 

Available-for-Sale

 

Held-to-Maturity

 

Total

 

Available-for-Sale

 

Held-to-Maturity

 

Total

Short-term investments

$139,444

 

$--

 

$139,444

 

$138,709

 

$--

 

$138,709

 

$170,500

 

$--

 

$170,500

 

The following table sets forth the aggregate fair value and the net unrealized gains included in accumulated other comprehensive income (loss) of our available-for-sale investments as of the dates indicated:

 

 

As of:

 

June 30, 2009

 

December 31, 2008

 

June 30, 2008

 

Aggregate Fair Value

 

Net Unrealized Gains

 

Aggregate Fair Value

 

Net Unrealized Gains

 

Aggregate Fair Value

 

Net Unrealized Gains

Available-for-Sale Investments:

 

 

 

 

 

 

 

 

 

 

 

Variable rate demand notes

$--

 

$--

 

$30,500

 

$--

 

$170,500

 

$--

Government obligations

69,098

 

65

 

53,056

 

146

 

--

 

--

Government agency
      obligations


29,841

 

69

 


29,641

 

165

 


--

 

--

Corporate obligations

40,505

 

114

 

25,512

 

117

 

--

 

--

 

$139,444

 

$248

 

$138,709

 

$428

 

$170,500

 

$--

 

We also held a certificate of deposit with a total principal value of $5,056 as of June 30, 2009. This investment is included in short-term investments on our Condensed Consolidated Balance Sheet.

 

The following table sets forth the components of investment income included in interest income in our Condensed Consolidated Statements of Income in the periods indicated:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2009

 

2008

 

2009

 

2008

Interest income

 

$878

 

$1,174

 

$2,111

 

$3,204

Net realized gain on sale
    of investments

 

--

 

--

 

--

 

--

 

 

$878

 

$1,174

 

$2,111

 

$3,204

 

The following table sets forth the contractual maturities of our debt securities classified as available-for-sale as of June 30, 2009:

 

Contractual Maturity

 

Available-for-Sale

Due within five years

 

$139,444

Due after five years through ten years

--

Due after ten years

 

--

 

 

$139,444

 

9.

Note Receivable

 

In May and June 2009, we made advances to an unaffiliated third party, whose purpose is to purchase private education loans and sell participation interests in those loans. The third party used the advances from us to provide partial funding for private education loans made to our students. As of June 30, 2009, we had advanced $13,920 to this entity. The advances bear interest at a rate based on the Prime Rate plus an applicable margin. Substantially all of the assets of the third party serve as collateral for the advances. The advances are subject to customary terms and conditions and may be repaid at any time without penalty prior to their maturity date of June 26, 2024.

 

As a result of this transaction, we held a variable interest in this third party, but we are not considered the primary beneficiary for purposes of including the financial results of this third party in our consolidated financial statements. If we had been required to include the financial results of this third party in our consolidated financial statements for the three-month period ended June 30, 2009, it would not have had a material effect.

 

 

- 11 -

 

 

 

10.    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

 

Six Months Ended

 

June 30,

 

June 30,

 

2009

 

2008

 

2009

 

2008

 

(In thousands)

Shares:

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding

37,981

 

38,842

 

38,268

 

39,020

Shares assumed issued (less shares assumed purchased for treasury)

 

 

 

 

 

 

 

for stock-based compensation

444

 

325

 

474

 

319

Outstanding shares for diluted

 

 

 

 

 

 

 

earnings per share calculation

38,425

 

39,167

 

38,742

 

39,339

 

A total of 452,115 shares at June 30, 2009 and 407,395 shares at June 30, 2008 were excluded from the calculation of our diluted earnings per common share because the effect was anti-dilutive.

 

11.

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

 

Six Months

 

 

Ended June 30,

 

Ended June 30,

 

 

2009

 

2008

 

2009

 

2008

Interest cost

 

$774

 

$738

 

$1,548

 

$1,538

Expected return on assets

 

(954)

 

(1,301)

 

(1,908)

 

(2,614)

Recognized net actuarial
   loss

 


566

 


--

 


1,132

 


--

Amortization of prior
   service cost

 


7

 


--

 


14

 


--

Net periodic pension cost
   (benefit)

 


$393

 


($563)

 


$786

 


($1,076)

 

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 has been included in the net periodic pension cost or benefit.

 

We made no contributions to the ESI Pension Plan during the three or six months ended June 30, 2009 and 2008. We do not expect to make any contributions to the ESI Pension Plan in 2009. We contributed $528 to the ESI Excess Pension Plan in the three and six months ended June 30, 2009. No contributions were made to the ESI Excess Pension Plan in the three and six months ended June 30, 2008.

 

12.

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 June 30, 2009, the total face amount of those surety bonds was approximately $19,937.

 

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 campuses to additional regulatory scrutiny.

 

Guarantees. In February 2009, we entered into an agreement with an unaffiliated third party whereby private education loans are provided to our students to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover (the “Private Student Loan Program”). In connection with the Private Student Loan Program, we entered into a risk sharing agreement (“2009 RSA”) under which we have guaranteed the repayment of any private education loans that are charged off above a certain percentage of the private education loans made under the Private Student Loan Program, based on the annual dollar volume. As of June 30, 2009, approximately $37,000 of private education loans had been made under the Private Student Loan Program. Our obligations under the 2009 RSA will remain in effect until all private education loans made under the Private Student Loan Program are paid in full or charged off. We did not record a liability for our guarantee obligations under the 2009 RSA as of June 30, 2009, because we do not anticipate that the private education loans charged off will exceed the percentage that would require us to make a payment under our guarantee.

 

 

- 12 -

 

 

 

Pursuant to the 2009 RSA, we are required to maintain collateral to secure our guarantee obligation in an amount equal to a percentage of the total private education loans disbursed to our students under the Private Student Loan Program. As of June 30, 2009, the total collateral maintained in a restricted bank account was $2,009. This amount is included in Other assets on our Condensed Consolidated Balance Sheet as of June 30, 2009. The 2009 RSA also requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured on a quarterly basis. We were in compliance with these covenants as of June 30, 2009.

 

We also are a party to a separate risk sharing agreement (the “2007 RSA”) with a different lender for certain private education loans that were made to our students in 2007 and early 2008. We guaranteed the repayment of any private education loans that the lender charges off above a certain percentage of the total dollar volume of private education loans made under this agreement. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the 2007 RSA that we pay to the lender pursuant to our guarantee obligation. The 2007 RSA was terminated effective February 22, 2008, such that no private education loans have been or will be made under the 2007 RSA after that date. Our obligations under the 2007 RSA will remain in effect until all private education loans under the agreement are paid in full or charged off by the lender.

 

The maximum future payments that we could be required to make pursuant to our guarantee obligation under the 2007 RSA are affected by:

the amount of the private educations loans made under the 2007 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 the 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 2007 RSA. Our recorded liability related to the 2007 RSA as of June 30, 2009 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 campuses;

our ability to implement our growth strategies;

 

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

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

 

loss of access by our students to lenders for student 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, 2008 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 March 31, 2009 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

 

 

- 13 -

 

 

 

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 “Daniel Webster College” (in singular or plural form) refer to an individual campus 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, 2008 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 of the Higher Education Act of 1965, as amended (the “Title IV Programs”);

 

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 loan programs;

 

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.

 

In this management’s discussion and analysis of financial condition and results of operations, when we discuss factors that contributed to a change in our financial condition or results of operations, we disclose the primary factors that materially contributed to that change.

 

Background

 

We are a leading provider of technology-oriented postsecondary education programs in the United States based on revenue and student enrollment. As of June 30, 2009, we were offering master, bachelor and associate degree programs to more than 69,000 students. As of June 30, 2009, we had 117 locations (including 108 campuses and nine learning sites) in 38 states. All of our locations 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 and since June 2009 under the “Daniel Webster College” name.

 

In the second quarter of 2009, we began operations at one new ITT Technical Institute campus. We plan to begin operations at four to six additional locations during the remainder of 2009. Our overall expansion plans include:

 

operating new campuses;

 

adding learning sites to existing campuses;

 

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

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

 

 

On June 10, 2009, we acquired substantially all of the assets and assumed certain liabilities of DWC for approximately $20.8 million in cash, net of cash acquired. DWC’s campus is located in Nashua, New Hampshire. DWC is authorized by the New Hampshire Postsecondary Education Commission and is accredited by the Commission on Institutions of Higher Education of the New England Association of Schools and Colleges. DWC currently offers programs of study at the master, bachelor and associate degree levels both in residence and through distance education.

 

Our condensed consolidated financial statements include the results of operations of DWC from the acquisition date. The revenue and expenses of DWC that are included in our Condensed Consolidated Statements of Income for the three and six months ended June 30, 2009 were not material.

 

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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, 2008 filed with the SEC. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments.

 

New Accounting Pronouncements

 

The following new accounting pronouncements became effective for us beginning with our second fiscal quarter of 2009:

 

SFAS No. 165, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. We performed an evaluation of subsequent events through July 22, 2009, and we issued our financial statements on July 23, 2009.

FSP No. 107-1 and APB 28-1, which requires disclosures about fair value of financial instruments for interim reporting periods. See Note 4 of the Notes to Condensed Consolidated Financial Statements for the required disclosures.

FSP No. 157-4, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or disclosures.

FSP No. 115-2 and 124-2, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or disclosures.

 

The following new accounting pronouncements became effective for us beginning with our first fiscal quarter of 2009:

 

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

SFAS No. 161, which expands the disclosure requirements for derivative instruments and hedging activities. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

SFAS No. 160, which establishes accounting and reporting standards for the noncontrolling interest of a subsidiary and for the deconsolidation of a subsidiary. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

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. The adoption of this pronouncement did not have a material impact on our condensed consolidated financial statements.

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. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

FSP No. 157-2, which delayed 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.  The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 168, which replaces SFAS No. 162 and establishes the Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The Codification will be effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our third fiscal quarter of 2009, all references made by us to GAAP will use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not expected to have any impact on our consolidated financial statements.

 

In June 2009, the FASB issued SFAS No. 167, which amends certain requirements of FIN 46(R) to improve the financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This pronouncement is effective for our interim and annual reporting periods beginning January 1, 2010. We

 

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have not determined the effect that the adoption of this pronouncement will have on our condensed consolidated financial statements and disclosures.

 

Also in June 2009, the FASB issued SFAS No. 166, which provides guidance to improve transparency about transfers of financial assets and a transferor’s continuing involvement, if any, with transferred financial assets. It also clarifies the requirement for isolation and limitations on portions of financial assets that are eligible for sale accounting, eliminates exceptions for qualifying special-purpose entities from the consolidation guidance and eliminates the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the financial assets. This pronouncement is effective for our interim and annual reporting periods beginning January 1, 2010. We have not determined the effect that the adoption of this pronouncement will have on our condensed consolidated financial statements and disclosures.

 

In December 2008, the FASB issued FSP No. 132(R)-1, which requires enhanced disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan. These disclosures are intended to provide users of financial statements with a greater understanding of how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. FSP No. 132(R)-1 will apply to our plan asset disclosures beginning with our fiscal year ending December 31, 2009.

 

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

 

Six Months Ended

 

June 30,

 

June 30,

 

2009

 

2008

 

2009

 

2008

Revenue

100.0%

 

100.0%

 

100.0%

 

100.0%

Cost of educational services

34.9%

 

38.6%

 

35.0%

 

38.9%

Student services and administrative
    expenses

28.1%

 

30.4%

 

29.1%

 

31.0%

Operating income

37.0%

 

31.0%

 

35.9%

 

30.1%

Interest income, net

0.2%

 

0.0%

 

0.3%

 

0.1%

Income before provision for income
    taxes

37.2%

 

31.0%

 

36.2%

 

30.2%

 

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

 

 

 

2009

 

2008

 

 

Total

 

Increase

 

Total

 

Increase

Total Student

 

Student

 

Over

 

Student

 

Over

Enrollment as of:

 

Enrollment

 

Prior Year

 

Enrollment

 

Prior Year

March 31

 

65,620

 

21.1%

 

54,194