NEWS

Woes stack up for Carmel-based ITT Tech

Jeff Swiatek and Stephanie Wang

Among for-profit colleges already under intense scrutiny, ITT Educational Services is fighting trouble on many fronts.

The stock price in the Carmel-based parent of for-profit college ITT Technical Institute has plummeted 75 percent year-to-date. Within the past week, its CEO announced his resignation. A potential money-raising deal to sell a passel of its properties fell through.

And that’s not all.

ITT’s also being sued by the federal government over accusations of predatory lending. And its budgetary books are not in order, causing it to miss its 2013 full year and 2014 first quarter earnings results and a summer deadline for filing its annual financial report with federal regulators. That opens ITT to potential sanctions from the U.S. Department of Education, including a cut-off from its life-blood of federal student aid money.

The sticky issues are stacking up for the national chain, as federal regulators heighten their scrutiny of for-profit colleges. What’s at stake in the case of ITT: the fate of a large workforce and thousands of students.

In Indianapolis, ITT employs 620 workers at two campuses, its headquarters and a student support center. About 860 students are enrolled in the metro area and 57,000 nationally, mostly in associate degree programs.

ITT says despite its problems, it maintains a stable cash flow and has taken steps to meet the demands of federal regulators.

But education experts and stock analysts see a company struggling to ward off the same kind of regulatory crackdown that recently forced the collapse of another for-profit college college, California-based Corinthian Colleges Inc.

“What were once reliable moneymakers are now running into trouble,” said New America Foundation senior policy analyst Ben Miller.

“This is pretty much a period of turmoil for the company and the overall industry. They’re fighting here to manage this crisis on several different fronts,” said Michael Tarkan, a research analyst in Washington, D.C., for the investment firm Compass Point Research & Trading.

In an interview with The Indianapolis Star, ITT spokeswoman Nicole Elam said the company is working its way through its problems.

ITT is exploring other options to sell its properties, she said, while seeking new leadership. And she said company officials are in constant contact with the Department of Education, which she said has shown patience toward ITT as it tries to re-audit its books and disclose past-due financial filings.

ITT’s woes have deepened as the Obama administration works to enact new regulations to protect students from incurring massive amounts of loan debt. The rules are aimed at certain for-profit college programs, which the U.S. Department of Education has criticized for relatively high-cost degrees that sometiimes lead to earnings lower than those of high school dropouts.

Calling the proposed regulations “arbitrary and capricious,” Elam said ITT no longer offers some of the programs that wouldn’t make the cut — such as visual communications.

What’s likely to hurt ITT more are the company’s financial stumbles, caused in part by a private-loan program the company enacted several years ago, and a potential backlash from investors and lenders.

A warning shot

The downfall of Corinthian Colleges, after the Department of Education withheld its federal student-aid payments, was a warning shot to ITT and other for-profit schools, said Tarkan.

“Before Corinthian…there was a perception that these schools were too big to fail,” the analyst said. “Now people understand how quickly things can unwind.”

The California-based chain, which runs Everest College, WyoTech and Heald College, was bigger than ITT, with 72,000 students. In July, it said it would shut down or sell its nearly 100 campus locations because it couldn’t survive the tuition cutoff.

Federal education officials used their regulatory powers to withhold tuition payments because the school hadn’t responded to requests for information on job placement for its graduates.

It’s a different situation with ITT, which has missed a June 30 deadline to turn over its 2013 financial statement to the education department. But that gives the department a reason, if it wants one, to do what it did to Corinthian and withhold tuition payments to ITT.

Like other for-profit schools, ITT depends on those payments to cover most of the costs of educating its students, who tend to have low incomes and little savings to pay their own way through school.

Elam said ITT doesn’t expect the department will take a hard line and cut off tuition payments.

She said company has told federal officials that it needs time to re-audit its books because it’s under guidance from the Securities & Exchange Commission to redo its financial reporting from 2013 onward, to include the impact of a private student loan program that previously was accounted for separately.

The controversial money-losing private loan program ran from 2009 to 2011 and has since been discontinued, replaced by scholarships that ITT itself provides.

ITT became the target of a lawsuit filed earlier this year by the Consumer Financial Protection Bureau, a federal agency, which accused the college of predatory lending practices with the private loans. The lawsuit alleges ITT pushed its students toward the high-interest private loans, knowing most students couldn’t repay.

ITT called the lawsuit unfounded in a statement and asked the court to dismiss it.

Cash-strong position

What gives investors and others some confidence that ITT won’t go the route of Corinthian is ITT’s relatively cash-strong position.

ITT had more than $200 million in cash on its books at the end of 2013 and even if that number shrinks once the books are re-audited, the company is still expected to generate at least $50 million in cash from its business this year, said Trace Urdan, a senior stock analyst at Wells Fargo Securities in San Francisco who follows for-profit colleges.

“How dire it (ITT’s condition) is depends on what you think the condition of the business is likely to be, and how nefarious you think the intentions of the Department of Education are,” Urdan said. He said the federal government’s regulation of for-profit colleges has become harder to predict because it’s become more politicized, with some members of Congress now publicly pressuring the department to crack down on for-profit colleges.

There’s also the potential, disclosed by ITT in a securities filing, that the education department would make ITT post a letter of credit against its federal student-aid payments if ITT’s financial condition deteriorates. That letter of credit could amount to $75 million, though Urdan thinks it wouldn’t top $50 million.

In case the letter of credit is required, ITT recently outlined a plan to sell and lease back 24 campus buildings it owns. The sale-leaseback deal would raise $120 million, ITT said. But last week ITT said the sale-leaseback fell through after the unnamed buyer asked for more time to do due diligence on the sale, citing ITT’s pending re-audit of its books. Instead of granting the extension, ITT pulled the offer and is looking at other options to use its properties to raise money.

Urdan said it’s unclear if ITT can extract cash from its properties, given concerns over ITT’s future. “Their real estate holdings have value. The question is, what will someone pay for them?”

Plunging stock price

ITT’s delay in releasing its 2013 full-year results and any financial data from this year makes it hard to tell if its mounting problems have taken a financial toll.

But this much is known: ITT’s financial fortunes aren’t nearly as rosy as they were just a few years ago.

For-profit, publicly traded colleges have always been profitable. At ITT, which went public 20 years ago, profit margins topped 20 percent of revenue every year from 2008 to 2011. That kind of money-making performance sent ITT’s stock soaring, to over $100 a share by early 2010.

But ITT’s revenue that rose to $1.6 billion by 2010 slipped over each of the next two years, reaching $1.3 billion in 2012. That year its profit dipped by more than 50 percent from 2011, to just 11 percent of revenue.

And the stock price has plunged as well, to a 52-week low of $7.46. Last week it recovered slightly, trading around $8.50.

That’s without any solid financial results to go by. “We’re all waiting on them to file their financial statements,” said Urdan, the Wells Fargo analyst.

Making ITT’s situation even dicier was the surprise announcement last week of Kevin Modany’s resignation as CEO after seven years in the job. He’ll remain in his post until February, but stepped down immediately as chairman of the board.

Elam said Modany’s resignation came as a surprise but he wasn’t forced out. It was more like he was burned out, from having to cope with a tide of legal and regulatory issues, she said.

Modany pulled down more than $8.7 million in total compensation as CEO in 2012 (the last time his pay was disclosed). But Modany’s pay was strongly linked to the company’s stock performance, which has turned strongly negative.

Elam said the company will press on without him: “The fact that your CEO resigns doesn’t stop the train from moving.”

Call Star reporter Stephanie Wang at (317) 444-6184. Follow her on Twitter: @stephaniewang.