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ITT Educational Services Inc. Reports Operating Results (10-Q)

October 29, 2012 | About:
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10qk

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ITT Educational Services Inc. (ESI) filed Quarterly Report for the period ended 2012-09-30.

Itt Educational Services, Inc. has a market cap of $501.1 million; its shares were traded at around $21.49 with a P/E ratio of 2.4 and P/S ratio of 0.3. Itt Educational Services, Inc. had an annual average earning growth of 31.1% over the past 10 years. GuruFocus rated Itt Educational Services, Inc. the business predictability rank of 4.5-star.

Highlight of Business Operations:

Student services and administrative expenses increased to 35.0% of revenue in the three months ended September 30, 2012 compared to 30.4% of revenue in the three months ended September 30, 2011. The principal causes of this increase were a decline in revenue and an increase in bad debt expense, which were partially offset by a decrease in media advertising expenses. Bad debt expense as a percentage of revenue increased to 7.3% in the three months ended September 30, 2012 compared to 3.8% in the three months ended September 30, 2011, primarily as a result of an increase in the amount of internal student financing that we provided to our students in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase in the amount of internal student financing was primarily due to:

Operating income decreased $39.1 million, or 35.6%, to $70.8 million in the three months ended September 30, 2012 compared to $109.9 million in the three months ended September 30, 2011, primarily as a result of the impact of the factors discussed above in connection with revenue, cost of educational services, and student services and administrative expenses. Our operating margin decreased to 22.5% in the three months ended September 30, 2012 compared to 30.5% in the three months ended September 30, 2011, primarily as a result of the impact of the factors discussed above.

Student services and administrative expenses increased to 33.2% of revenue in the nine months ended September 30, 2012 compared to 29.1% of revenue in the nine months ended September 30, 2011. The principal causes of this increase were a decline in revenue and an increase in bad debt expense, which were partially offset by decreases in media advertising expenses and expenses related to student scholarships. Bad debt expense as a percentage of revenue increased to 5.8% in the nine months ended September 30, 2012 compared to 3.9% in the nine months ended September 30, 2011, primarily as a result of an increase in the amount of internal student financing that we provided to our students in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase in the amount of internal student financing was primarily due to a decline in the amount of private education loans available to our students in the nine months ended September 30, 2012 as a result of the expiration in 2011 of the two private education loan programs that provided the vast majority of private education loans to our students in 2011. See Financial Condition, Liquidity and Capital Resources Private Student Financing Update. We believe that our bad debt expense as a percentage of revenue will be in the range of 5.0% to 6.0% in 2012.

Operating income decreased $131.7 million, or 34.6%, to $248.8 million in the nine months ended September 30, 2012 compared to $380.5 million in the nine months ended September 30, 2011, primarily as a result of the impact of the factors discussed above in connection with revenue, cost of educational services, and student services and administrative expenses. Our operating margin decreased to 25.2% in the nine months ended September 30, 2012 compared to 33.6% in the nine months ended September 30, 2011, primarily as a result of the impact of the factors discussed above.

The increased amount of internal student financing that we provided to our students as a result of the expiration of the two primary private education loan programs for our students in 2011 has negatively impacted our liquidity and exposed us to greater credit risk. Internal student financing typically provides for payment to us by our students by the end of the students academic year or at the end of enrollment, whichever occurs first, compared to payments from private education loan programs, which we typically received at the beginning of a students academic year. This change in the timing of payments had a material adverse effect on our cash flows from operations in the first nine months of 2012. In addition, we have the risk of collection with respect to our internal student financing, which caused us to increase our allowance for doubtful accounts as of September 30, 2012 compared to September 30, 2011 and resulted in an increase in our bad debt expense as a percentage of revenue in the nine months ended September 30, 2012 to 5.8% compared to 3.9% in the nine months ended September 30, 2011. The increase in internal student financing was the primary cause of the 11.8-day increase in our days sales outstanding to 26.1 days as of September 30, 2012 compared to 14.3 days as of September 30, 2011. Further, our deferred revenue decreased $107.0 million, or 47.3%, to $119.1 million as of September 30, 2012 compared to $226.0 million as of September 30, 2011, primarily due to the decrease in the amount of funds received from private education loans made to our students by third-party lenders.

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