Business context and reporting period
Universal Technical Institute, Inc. (UTI) filed this unaudited Form 10-Q for the first quarter of fiscal 2021, the three months ended December 31, 2020. UTI provides technical postsecondary education through 12 U.S. campuses and manufacturer-specific training programs. Student tuition and fees are its primary revenue source; many students rely on federal Title IV aid and veterans’ benefits.
Financial performance and position
Unless stated otherwise, amounts are in millions of dollars.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Revenue | $76.1 | $87.2 |
| Operating income | $0.8 | $4.3 |
| Operating margin | 1.0% | 4.8% |
| Net income | $1.1 | $4.7 |
| Net income (loss) available for distribution after preferred dividends | $(0.2) | $3.4 |
| Diluted EPS | $(0.01) | $0.07 |
| EBITDA, non-GAAP | $4.3 | $7.8 |
| Cash provided by operating activities | $7.8 | $7.1 |
Operating expenses were $75.4 million, or 99.0% of revenue, compared with $83.0 million, or 95.2% of revenue, a year earlier. Educational services and facilities expense was $39.3 million (51.7% of revenue); selling, general and administrative expense was $36.0 million (47.3%). The filing attributes the operating-income decline principally to lower revenue, partly offset by lower occupancy, advertising and travel costs.
At December 31, 2020, cash and cash equivalents were $44.2 million, restricted cash was $15.0 million, and short-term held-to-maturity investments were $27.9 million. Current assets were $130.6 million and current liabilities were $112.5 million. UTI reported no line of credit or other long-term debt; it did have $152.5 million of operating lease liabilities and $0.2 million of finance lease liabilities.
Operating cash flow was $7.8 million. Investing activities used $37.2 million, primarily for $47.3 million of property and equipment purchases, including the $45.2 million purchase of its Avondale, Arizona campus, partly offset by $10.0 million of investment maturities. Cash, cash equivalents and restricted cash totaled $59.2 million at quarter-end, down from $88.9 million at September 30, 2020.
Material changes versus the prior comparable period
- Revenue fell $11.1 million, or 12.7%, year over year, despite a 1.8% increase in average undergraduate full-time enrollment to 11,813 and a 20.9% increase in new student starts to 1,927.
- Management said revenue was pressured by students progressing more slowly, catch-up lab work, and students retaking courses, all associated primarily with COVID-19. About 18% of students had catch-up lab work outstanding at quarter-end; less than 1% remained exclusively online. UTI reported approximately $2.0 million of deferred revenue associated with the disruption.
- Operating expenses declined by $7.6 million, less than the revenue decline. Operating margin decreased to 1.0% from 4.8%; net income decreased to $1.1 million from $4.7 million.
- Cash used in investing rose sharply because of the Avondale campus purchase. Property and equipment, net, increased to $116.6 million from $72.7 million at September 30, 2020.
- UTI adopted the expected-credit-loss standard (ASC 326) on October 1, 2020, increasing proprietary-loan receivables by approximately $1.6 million and retained earnings by $1.6 million.
Outlook, commentary and risks
Management stated that operating cash flow, cash on hand and investments should meet working-capital needs, capital expenditures, commitments and other liquidity requirements for at least the next 12 months. It is evaluating financing options for the Avondale campus purchase. No quantified revenue or earnings guidance was provided.
UTI plans to consolidate its MMI Phoenix campus into Avondale by the end of fiscal 2022 and to consolidate and reconfigure its UTI and MMI Orlando facilities by the end of fiscal 2021. It also described new and expanded industry training programs. A board-authorized share repurchase plan permits repurchases of up to $35.0 million, subject to approval by a majority of the Series A Preferred Stock voting power; no shares were repurchased during the quarter.
COVID-19 remains a key operating risk: delayed lab completion, leaves of absence or withdrawals could further affect revenue recognition and cash generation in 2021. Other material risks include compliance with extensive state, accreditation and federal Title IV requirements; continued access to student aid; enrollment and student employment conditions; and maintaining industry relationships. UTI noted new regulatory requirements taking effect July 1, 2021, and said it was assessing relief and funding under the CRRSAA.
UTI received the remaining $0.9 million of its prior CARES Act institutional HEERF allocation during the quarter for eligible costs. Separately, the Department of Education’s allocation schedule indicated approximately $16.8 million of HEERF II funding for student grants; UTI had submitted its application and the Department confirmed receipt, but the filing did not report receipt of those funds. The company disclosed that pending legal matters could have a material adverse effect, but said it could not estimate potential losses. Series A preferred dividends were $1.3 million for the quarter; the company had no common-stock dividend.
Important facts for investors to verify
- Whether student lab catch-up, program progression and enrollment trends improve, and how they affect revenue, deferred revenue and cash flow.
- Whether UTI receives the approximately $16.8 million HEERF II allocation and the permitted use and timing of those funds.
- The funding plan and total cash impact of the Avondale purchase and planned campus consolidations.
- Compliance with Title IV, state authorization and accreditation rules, including the effect of regulatory changes and student-aid dependence.
- The terms and any use of the $35.0 million repurchase authorization, which requires preferred-stockholder approval, and the continuing preferred-dividend burden.