Shares of for-profit educator ITT Educational Services (NYSE:ESI) leapt 14% in the wake of Thursday morning's report of astounding profits growth. Reporting on the results for Q3 2005, the no-longer-under-investigation company announced that it had transformed 12% revenue growth into an 86% increase in profits.
That over-hyphenated mouthful in the paragraph above provided much of the impetus for ITT's earnings growth. Last year, the company spent $6.5 million on lawyers and accountants to defend itself against a federal investigation, dragging down its results. This year, the removal of related anticipated costs in a "reserve for special legal and other investigation costs" put $9.8 million (pre-tax) dollars back in the company's coffers.
In other words, the investigation made ITT's results this quarter look better than they "really" were by (a) depressing profit last year and (b) inflating profit this year -- compounding the company's comparative performance. Even if we backed out the legal costs from both Q3 2004 and Q3 2005, however, the company would still have boosted its GAAP profits by an impressive 25% -- far in excess of revenue growth.
Overall, it was a stellar quarter in any light -- including a cash flow perspective. In Q3, ITT reversed the trend of declining free cash flow that had plagued it earlier this year. This company invests cash in its business in two major forms: capital expenditures and expenditures on facilities and land. Deducting those costs from its cash generated from operations, the company produced $41.6 million in free cash flow in Q3 2005, more than double the $19.5 million generated in the year-ago quarter.
That performance helped strengthen the company's already robust balance sheet, which now reflects $82 million more in net cash and equivalents than it did one year ago -- $394.5 million in all, and still zero debt. For its size, ITT now has the strongest balance sheet of any company in the industry, with cash and equivalents making up 15.4% of its total market cap. For comparison, that's better than (in order) Career Education (NASDAQ:CECO), Strayer (NASDAQ:STRA), Apollo Group (NASDAQ:APOL), Corinthian (NASDAQ:COCO), or DeVry (NYSE:DV).
Strong cash flow is no stranger to ITT. Read about its past success in:
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Fool contributor Rich Smith does not own shares of any company mentioned in this article.
