ITT Educational Services, Inc. ESI recently filed Form 10K for fiscal 2014. The company reported earnings per share of $1.23 in fiscal 2014 as against a loss of $1.15 in fiscal 2013. However, revenues for fiscal 2014 came in at $961.8 million, down 10.3% year over year.
Operating margin increased 70 basis points (bps) to 6.4%. As a percentage of revenue, bad debt expense improved 30 bps to 6.6% during the year.
ITT Educational Services also provided guidance for 2015. New student enrollments in 2015 are expected to decline year over year in the range of 10% to 15%. Earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be in the range of $90 million and $110 million. EBITDA in 2015 includes $20 million of legal and other professional fees expenses. The company expects to file its first quarter 2015 Form 10-Q with the U.S. Securities and Exchange Commission (SEC) on or before Jun 15, 2015.
ITT Educational Services has been in the news for all the wrong reasons. In May 2015, the SEC pressed fraud charges against the company and two of its executives.
The charges were filed against its chief executive officer, Kevin Modany and its chief financial officer, Daniel Fitzpatrick in the U.S. District Court for the Southern District of Indiana. The SEC claimed that the post-secondary education company concealed its actual financial status from its investors.
The SEC claimed that when the private student loan market collapsed, ITT Educational offered two off-balance sheet student loan programs named “PEAKS” and “CUSO.” In order to convince investors to finance these high-risk loans, the company offered a guarantee of limited risk of loss from the loan pools.
However, by 2012, these two loan programs had performed poorly and the guarantee obligations provided by ITT Educational Services were triggered. The education company was required to pay back hundreds of millions of dollars due to its guarantees.
In this connection, in the present press release, ITT Educational Services revealed that under its PEAKS loan program, the company expects to pay $29.8 million in 2015; $4.3 million in 2016; and $15.3 million in 2020. Under the CUSO program, the company expects to pay $14.4 million in 2015, $15.9 million in 2016, $17.6 million in 2017 and $78.7 million in 2018 and later. Total estimated payments under the CUSO program is $126.7 million over the years.
The education company also revealed that its composite score based on fiscal 2014 results is above 2.0. A composite score is an important financial responsibility measurement of the U.S. Department of Education (DoE). The DoE demands that an educational institution must have at least 1.5 score in order to be considered as financially responsible.
ITT Educational Services mentioned that it derived about 80% of its revenues in 2014 from Title IV programs compared with 82% of revenues in fiscal 2013, as per the 90/10 Rule calculations.
Other education companies are also facing the wrath of the DoE due to violation of federal securities law.
In May 2015, another education company, Corinthian Colleges, Inc., shut down its remaining 28 ground campuses. Corinthian Colleges, since the last year, has been having a rough time with the DoE. Corinthian had allegedly falsified job placement rates and misplaced students’ attendance records at some of its schools, which led to the strict action by DoE.
ITT Educational Services has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in the education industry include New Oriental Education & Technology Group Inc. EDU, Career Education Corp. CECO and Bright Horizons Family Solutions, Inc. BFAM. While New Oriental Education & Technology sports a Zacks Rank #1 (Strong Buy), Career Education and Bright Horizons Family Solutions carry a Zacks Rank #2 (Buy).
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