Greetings, ladies and gentlemen, and welcome to the ITT Educational Services, Inc. 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.
Joining us today from the management of ITT Educational Services, we have Kevin Modany, Chief Executive Officer; and Rocco Tarasi, Executive Vice President and Chief Financial Officer. Before we begin, ITT Educational Services, Inc. wishes to remind you that this conference call may include forward-looking information.
Actual results may differ from the information presented during this call. For additional information, please review the section on forward-looking information contained in the news release dated November 05, 2015 or in the company's public filings with the U.S. Securities and Exchange Commission. Thank you, Mr. Modany. You may begin..
Thank you. Good morning, ladies and gentlemen and thank you for joining us on this conference call to review our 2015 third quarter financial and operating results. Joining me on the call this morning is our Executive Vice President and Chief Financial Officer, Rocco Tarasi.
On the call today, we will provide prepared comments regarding the financial and operating results that we released earlier this morning in addition to providing an update on our few other corporate matters. As has been our practice, recent practice we will not be taking any analyst questions at the conclusion of our prepared remarks.
I wanted a [Indiscernible] instead of giving me a warmer results that we have reported in today’s release. New student enrolment in the three month ended September 30, 2015 decreased 18.4% compared to the three months ended September 30, 2014.
We should note the beginning in the three months ended September 30, 2015 we revised our definition of a new student to exclude any student who was a first time student and was enrolled in our online degree program who did not continue to attend classes and answer our program on study beyond the first 15 days when the program starts or 30 days if the student was only enrolled in courses that are taught over a 12-week period.
The impact of this change to our new student definition was to reduce new student enrolment for the third quarter of 2015 by 488 students as compared to what would have been reported under the prior definition.
As we now modified the definition of a new student in the third quarter of 2015, new student enrolment would have declined by 15.8% compared to the same period in the prior year.
We should point out that our accounting policies for revenue recognition are not based on the definition of a new student and therefore our revenue recognition is not impacted by this revised definition. Turning back to discuss a bit more about the new student enrolment results for the quarter.
For the volume of prospective student increase achieved in the third quarter of 2015 was only slightly below our expectations when factoring in the plan mix of lead sources, we experienced a decrease in the rate of which prospective students enquired about our education programs actually began attending classes in their education programs in the three months ended September 30, 2015 compared with the same period in the prior year.
We continue to believe that the conversion of prospective student increased to new students is being impacted by prospective students, greater sensitivity to the cost of pro secondary education and even uncertainty about the value of pro secondary education due to the prolonged economic and labor market disruptions as well as the impact of negative media.
We have recently taken a number of steps and continue to implement additional initiatives in our wide ranging efforts related to new student enrolment opportunities including the limitation conduct a comprehensive market research to better understand prospective students, prospective in need, redesigning our website and prove user experience and usability, refining our marketing, advertising and messaging to more effectively communicate with prospective students regarding potential outcomes and related value proposition of an ITT technical institute education maintaining the availability of institutional scholarships from [Indiscernible] the opportunity scholarships which were attended to help reduce the cost of an ITT technical institute education and increased student access through our education programs, investing in enhanced training for our admission representatives and increasing our customer service functions and activities and more specifically increasing the frequency of and implementing new forms of customized communications with prospective students at various points in the enrolment process.
The student enrolment environment continues to present headwinds for institutions across the entire IR education landscape.
That said, we are certainly now pleased with our new student enrolment results and as a result are actively working to improve and enhance our communications with the more than 1.5 million prospective students that indicate an interest in our education programs each year.
Our related efforts are focused on improving the frequency and quality of the information that we provide to interested prospective student to assist them in making a firm decision about their choice for post secondary education.
We believe that -- our communications for particular needs of each type of prospective student we could increase the number of people that begin their pursuit of a career based high quality post secondary education with our institution.
While we are cautiously optimistic regarding the future results of the various new student enrolment initiatives that we are implementing, it is far too early in the effort to communicate any material progress.
Given that we are in the infancy stages of our roll out of our prospective student communication initiatives and the ongoing headwinds in the market, we currently estimate that new student enrolment for the three months ended December 31, 2015 maybe approximately 15% to 20% less than the same prior year period.
As of November 02, 2015 new student applications for the academic period that is scheduled to begin in December 2015 net of cancellations were 19% less than at the same date in the prior year. In summary, what a new student enrolment environment continues to be very volatile.
We are focusing on our efforts to turn the tide of declining new student enrolment. In the interim we plan to remain focused on operating our institution in the most effective and efficient manner possible or are remaining keenly focused on the needs of our students and the employers who hire them.
Turning now to a quick discussion of student persistence rates. Just as a reminder the student persistence range measures the number of continuing students in any academic term divided by the total student enrolment in education programs and immediate proceeding academic term.
On September 30, 2015 student persistence rates declined by 40 basis points to 69.5% compared to 69.9% as of the same date in the prior year.
The decline in student persistence as of September 30, 2015 was impacted by year-over-year decline in student retention as well a small increase in the number of graduates in the three months ended September 30, 2015 compared to the same prior year period.
As part of our ongoing efforts related to improving student retention, our academic leadership team recently implemented a pilot program at a select number of campuses.
This pilot programs modifies the academic sports schedule to include the implementation of blended learning delivery methodologies and to adjust the number of classroom content dollars for prior for full time students who are in the first quarter of their programs of study.
The very early results of this 20 campus product program generated very positive retention results that included a 500 basis point improvement and the percentage of students who completed their first quarter study in the June 2015 academic quarter and who began their second quarter courses in the September 2015 academic quarter as compared to that same period metric for the non [Indiscernible].
We are very encouraged by these early results and believe that we will expand this pilot program to other campuses as part of our ongoing efforts to improve student retention and persistence rates. Before I hand the call over to Rocco, I would like to provide you with a brief update on the legal and regulatory fund.
There are no material updates or report on the AG, CFEB, and/or SEC matters at this time. In the fourth quarter of 2015, we executed agreements to settle both of the outstanding securities class [ph] education losses filed against us.
The settlement must be approved by the applicable courts; however we are cautiously optimistic that the settlements will receive court approval. We are also engaged in discussions to settle all outstanding share holder derivative loss filed against us; however we do not have a tenant of settlement agreements to report to you today.
Rocco will discuss the impact of the class action settlements on our third quarter 2015 financials. Lastly, as previously disclosed on October 19, 2015 we received a letter from the U.S. Department of Education identifying additional procedures that we are required to implement as a result of the identification of certain pass deficiencies.
These additional procedures are a result in the delay of our receipt of Title IV Program fund. While these additional procedures will affect the timing of our receipt of Title IV Program funds and impose an administrator burden on us we do not expect to have a significant negative effect on our overall cash flow or operations.
The letter also states that we are required to provide certain additional information and reporting to be had on a regular basis. We have implemented and are in the process of implementing measures to comply with the EDs requirement.
We do not expect these additional reporting requirements to have a materially negative impact on our financial or our operating results. At this point, I’d like to hand the call over to Rocco for a review of the financial results included in this morning’s release..
Thanks, Kevin. I’ll begin my comments with a review on the few of the financial metrics for the third quarter of 2015. Revenue decreased $39.4 million or 16.2% to $203.2 million in the three months ended September 30, 2015 compared to $242.6 million in the three months ended September 30, 2014.
The primary factor that contributes to this decrease was a 13.7% decrease in total student enrolment as of June 30, 2015 compared to June 30, 2014. Cost of educational services decreased $24.3 million or 20.6% to $93.3 million in the three months ended September 30, 2015 compared to $117.5 million in the three months ended September 30, 2014.
The primary factors that contribute to the decrease were, a decrease in compensation of benefit cost resulting from fewer employees, a decrease in core supplies as a result of lower total student enrolments and a decrease in campus operating cost resulting from fewer locations.
Student services and administrative expenses decreased $15.8 million or 15.7% to $84.6 million in the three months ended September 30, 2015 compared to $100.4 million in the three months ended September 30, 2014. The principle causes of this decrease were decreases in bad debt expense, media advertising expenses and compensation and benefit cost.
Bad debt expense as a percentage of revenue decreased to 3.4% in the three months ended September 30, 2015 compared to 6.9% in the three months ended September 30, 2014 primarily as a result of a reduction in internal student financing from utilization of the Opportunity Scholarship and other institutional scholarships and rewards.
In the three months period ended September 30, 2015 we reported an impairment charge of $5.2 million for the impairment of goodwill related to our acquisitions of the corporate training businesses at SCOPA and Benchmark Learning.
The amount of the impairment charge is equal to the difference between the estimated fair value of the goodwill and its carrying value as of the impairment testing days. The impairment charge resulted in a write-off of all remaining goodwill associated with these two transactions.
Settlements and legal and professional fees related to certain lawsuits investigation of the accounting matters decreased $4.5 million or 39.5% to $6.8 million in the three months ended September 30, 2015 compared to $11.3 million in a three months ended September 30, 2014.
Included $6.8 million of settlements and legal and professional fees in the third quarter of 2015 was a $4.5 million charge, net of insurance recoveries related to the settlements of the securities class action lawsuits, Kevin previously mentioned.
The $4.5 million charge was reflected through the reporting of the full amount of the two agreed to settlement of $29.5 million offset by the reporting of agreed to recovery of related insurance proceeds of $25 million.
These settlements have been agreed to by the respective parties including our insurance providers, but there are still subject to the approval of the applicable course. Turning back now to the financial highlights.
The provision for private education loan losses of $0.8 million in the three months ended September 30, 2015 represented the increase in the allowance for loan losses on the private education loans that occurred from July 1, 2015 through September 30, 2015.
We reported a provision for private education loan losses of approximately $4.5 million in the three months ended September 30, 2014. Operating income increased $5.7 million or 84.5% to $12.5 million in the three months ended September 30, 2015 compared to $6.8 million in the three months ended September 30, 2014.
Interest expense increased $3.9 million or 66.5% to $9.7 million in the three months ended September 30, 2015 compared to $5.8 million in the three months ended September 30, 2014. Our combined federal and state effective income tax was 40.2% in the three months ended September 30, 2015 compared to 41.4% in the three months ended September 30, 2014.
The effective income tax rate was lower in the three months ended September 30, 2015 primarily due to the favorable settlements of state income tax matters.
Moving on now to discuss a few balance sheet and cash flow items; cash and cash equivalents were $131.5 million as of September 30, 2015 compared to $135.9 million as in December 31, 2014 and $204.2 million as of September 30, 2014.
Net cash generated from operating activities was $21.3 million in the three months ended September 30, 2015 compared to $33.1 million in the three months ended September 30, 2014 reflecting the impact of lower year-over-year student enrolment.
Accounts receivable less allowance for doubtful accounts was $42.8 million as of September 30, 2015 compared to $68.6 million as of September 30, 2014. Day’s sales outstanding decrease 6.6 days to 19.4 days as September 30, 2015 compared to 26.0 days as of September 30, 2014.
Our accounts receivable balance and days sales outstanding decrease as of September 30, 2015 primarily due to a decrease in the internal student financing caused by the utilization of the Opportunity Scholarship by our student since its introduction in 2012 and a decrease in total student enrolment.
Capital expenditure including expenditures for facility renovation expansion and construction totaled $3.3 million in the three months ended September 30, 2015 compared to $1.8 million in the three months ended September 30, 2014.
These expenditures consist of primarily of classroom and laboratory equipment such as computers and electronic equipment, classroom and office furniture, software and leasehold improvements.
Moving on now to review of our projected payments related to our guarantee and financing obligations, based on various assumption including an historical and projected performance and collections of student loans held by the PEAKS Trust and the CUSO.
Our current estimate of the payments we may have to make under the PEAKS guarantee and the CUSO risk sharing agreement or CUSO RSA, in the aggregate we believe are approximately $5.5 million in three months ended December 31, 2015, $25.3 million in 2016, $13.4 million in 2017 and $86.1 million in 2018 and later, which amount includes an approximately $13.2 million payment in 2020 under the PEAKS guarantee.
These estimated payment amounts are net of estimated aggregate recoveries of approximately 5.9 million under the CUSO RSA, which the company expects to offset against amounts due by it under the CUSO RSA over these periods.
Lastly, we currently estimate principal payments under the service financing agreement to be $14.7 million in the three months ended December 31, 2015 which includes a $12.2 million payment associated with an expected receipt of an $18.2 million federal income tax refund and $76.8 million in the first nine months of 2016, which includes both scheduled principal payments and anticipated required prepayment based on the projected impact of covenant requirements and a projected mandatory prepayments required by the agreement after which point we expect the full balance of the financing agreement to be repaid.
Based on our current projections we believe the cash generated from operations will be sufficient for us to satisfy our payments under the RSA's working capital, loan repayment and prepayment and capital expenditure requirements.
And now, before I turn it back over to Kevin, I'd like to close my comment by noting that assuming our new student enrolment estimate that Kevin discussed are realized and there are no material changes in our student retention metrics for the remainder of 2015 as compared to 2014.
Our internal goal for earning before insurance, taxes, depreciation and amortization for EBITDA for the 12 months ended December 31, 2015 is in the range of $90 million to $100 million. Please note that projected EBITDA is a non-GAAP financial measure and the reconciliation to projected net income is provided on our website at www.ittesi.com.
Our internal EBITDA goal include an estimated $21.1 million in expenses for various lawsuits investigation to the accounting matters that we believe are not representative of those normally incurred in the ordinary course of business including charges related to the securities class action, SEC, CFPB, Attorney General and DoJ matters.
It also includes an estimated $4.5 million in expense related to the settlement that the securities class action lawsuits discussed earlier, as well as $5.2 million expense for goodwill impairment charges reported in the third quarter of 2015. Kevin, back to you..