For-profit education provider ITT Educational Services has delivered sales and earnings growth in past economic downturns, as more people pursued post-secondary education to learn new, or upgrade existing, skills in order to help them compete in a soft economy and a tighter job market. Results for the third-quarter of 2008 ended September 30 proved no different, with sales and operating income up year-on-year 17 percent and 28 percent, on a 19.4% jump in student enrollment. Going forward, however, ITT's prospects during the current economic climate might be less sanguine, for disruptions in the credit markets have reduced significantly the amount of private loans available to potential students.
Chairman and Chief Executive Kevin M. Modany told analysts on the company's third-quarter 2008 conference call that its students did not suffer any additional restrictions on their ability to access private student loans during the quarter. In addition, based on recent conversations with the lenders who offered private loans to ITT's students during the third quarter, he did not anticipate students would have more difficulty obtaining third-party private loans during the remainder of 2008. A look at ITT's third-quarter 2008 FORM 10-Q filing, however, suggests evidence to the contrary:
- Beginning in the second quarter of 2008, we have extended larger amounts of unsecured credit to our students due to a decrease in private education loans made to our students by third-party lenders. We categorized these receivables based on the credit profiles of our students and recorded an allowance for doubtful accounts based on our historical collection experience related to amounts owed by students with similar credit profiles.
- If our collection trends were to differ significantly from our historical collection experience, we would make a corresponding adjustment to our allowance for doubtful accounts. We write off the accounts receivable due from former students when we conclude that collection is not probable.
CEO Modany contradicted himself, too, when he said that the funding gap for students on a forward looking 12-month basis would be about 13 percent of annual revenue, compared to a historical one percent to three percent of sales. In my opinion, should underwriting standards become more restrictive and the market for private student loans tighten further, internal funding for tuition could rise as high as 25 percent of annual sales.
ITT also said in the 10-Q regulatory filing that the company would "continue providing internally funded financing to our students who fail to qualify for private education loans made by third-party lenders." By definition, this implies the company will be boosting enrollment by lending monies to those with lower credit score ratings --and who statistically are "higher default" risks. If so, expect bad debt expense to rise materially in coming months.