ITT Educational Services (ESI) Swings to Profit in 2014; Updates on EBITDA Projections

ITT Educational Services (NYSE: ESI) reports FY14 revenue of $961.8 million and net income of $29.3 million, from revenue of $1.07 billion and net loss of $27.0 million reported for 2013. EPS was $1.23 in FY14, from a loss of $1.15 per share in the prior year.

The company reported that it believes, based on its 2014 fiscal year consolidated financial statements, that its institutions' composite score was above 2.0 in 2014. An institution's composite score is a significant financial responsibility measurement of the U.S. Department of Education (the "ED"), and must be at least 1.5 for the institution to be deemed financially responsible by the ED without the need for further oversight.

The company also announced that in the aggregate, it derived approximately 80% of its revenue in 2014 and 82% of its revenue in 2013 from Title IV programs under the ED's 90/10 Rule calculation. In addition, based on the current status of its efforts to complete the 2014 compliance audits of its institutions' administration of the Title IV programs in which they participate, the company believes that the 2014 compliance audits should be completed prior to the ED's June 30, 2015 deadline.

The company further reported its 2015 internal estimates for:

• new student enrollment in 2015 compared to 2014 in the range of a decrease of 10% to a decrease of 15%; and
• earnings before interest, taxes, depreciation and amortization ("EBITDA") in 2015 compared to 2014 in the range of $90 million to $110 million, which amounts include an estimated $20 million of legal and professional fees related to certain lawsuits, investigations and accounting matters.

The projected new student enrollment, EBITDA and EBITDA component amounts are subject to various risks and uncertainties, and do not guarantee actual results for the period indicated. Factors, risks and uncertainties that could cause actual results to differ materially from those projected include those discussed in the documents that the company files with the U.S. Securities and Exchange Commission. The company undertakes no obligation to update or revise any of the projections, whether as a result of new information, future developments or otherwise.

Projected EBITDA is an estimate of the company's net income plus interest, taxes, depreciation and amortization for the twelve months ended December 31, 2015. EBITDA is not a measurement under GAAP in the United States and may not be similar to EBITDA measures of other companies. Non-GAAP financial information should be considered in addition to, but not as a substitute for, information prepared in accordance with GAAP. The company believes that EBITDA provides useful information to management and investors as an indicator of the company's operating performance. Projected EBITDA is only an estimate and contains forward-looking information. The company has made a number of assumptions in preparing the projection, including assumptions as to the components of the projected EBITDA. These assumptions may or may not prove to be correct. In order to provide projections with respect to EBITDA, the company must estimate amounts for the GAAP measures that are components of the reconciliation of projected EBITDA. By providing these estimates, the company is in no way indicating that it is providing projections on those GAAP components of the reconciliation.

Projected EBITDA can be reconciled to the company's projected net income for the period indicated, as follows:

The company also announced that it has entered into a consent agreement with its lenders under the company's financing agreement, which consent extends to June 15, 2015, the deadline by which the company is required to deliver to the lenders the financial statements and related information for the company's fiscal quarter ended March 31, 2015. Based on the company's current estimates, it believes that it may file its first quarter 2015 Form 10-Q with the Securities and Exchange Commission on or before June 15, 2015. Due to the uncertainty around the timing of completion of the necessary reviews and analyses, however, the company cannot and does not provide any assurances that the filing will be completed in the estimated timeframe.

The company additionally disclosed that it has entered into a second amendment to the letter agreement with its Chief Executive Officer, Kevin M. Modany, to extend to August 31, 2015 the period during which he will remain in his current position.

Based on various assumptions, including the historical and projected performance and collection of the PEAKS Trust student loans, the company reported estimated payments under the PEAKS guarantee of approximately:

• $29.8 million in 2015;
• $4.3 million in 2016; and
• $15.3 million in 2020.

Based on various assumptions, including the historical and projected performance and collections of the CUSO student loans, the company reported estimates for the regular payments and discharge payments to the CUSO under the CUSO risk sharing agreement (the "CUSO RSA") and for the amount of recoveries from charged-off loans that the company expects to be paid to it by the CUSO (or that the company may utilize to offset a portion of the amounts of regular payments or discharge payments owed by the company) of approximately:

________________

The company reported that the vast majority of the $78.7 million of estimated payments projected to be paid after 2017 will be made in 2018. The estimated future payment amounts and timing related to the CUSO RSA assume, among other factors, that the company does not make any discharge payments in 2015, 2016 or 2017 (other than the discharge payment made in March 2015 pursuant to the terms of the Fifth Amendment to CUSO RSA) and does make discharge payments to the fullest extent possible in 2018 and later years. If the company does not make the discharge payments as assumed in 2018 and later years, the company estimates that it would make approximately $100.3 million of regular payments in 2018 through approximately 2026. Of this amount, approximately $18.6 million to $20.0 million would be paid annually in each of 2018 through 2021, and approximately $22.7 million in the aggregate, would be paid in 2022 through 2026.

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