Universal Technical Institute, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. The filing also reports fourth-quarter results; “2020 Q4” is not the annual reporting period.
Business context
UTI provides postsecondary technical education through 12 campuses, primarily in automotive, diesel, collision repair, motorcycle, marine, welding and CNC programs, plus manufacturer-specific training. It closed its Norwood, Massachusetts campus on July 31, 2020. Its business depends substantially on student tuition and government aid: about 66% of fiscal 2020 cash-basis revenue came from Title IV programs and 17% from veterans’ benefits.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $300.8 million | $331.5 million |
| Operating expenses | $304.6 million | $339.3 million |
| Operating income (loss) | $(3.9) million | $(7.8) million |
| Operating margin | (1.3)% | (2.4)% |
| Net income (loss) | $8.0 million | $(7.9) million |
| Operating cash flow | $11.0 million | $21.7 million |
| Cash and cash equivalents | $76.8 million | $65.4 million |
| Short-term held-to-maturity investments | $38.1 million | None |
| Working capital | $58.5 million | $21.3 million |
| Total assets | $442.0 million | $270.5 million |
Amounts are in U.S. dollars. FY2020 net income included a $10.6 million income tax benefit, principally reflecting CARES Act net operating loss carrybacks and valuation-allowance changes. EBITDA, a non-GAAP measure, was $9.4 million versus $11.4 million. The company reported no short- or long-term borrowings at year-end; operating lease liabilities were $157.8 million.
Fiscal 2020 revenue declined 9.3%. Average full-time enrollment fell 2.0% to 10,462, although ending enrollment increased 1.3% to 12,524. Graduates declined 19%. Revenue per student averaged approximately $28,750, net of company-funded scholarships and grants.
Fourth quarter: Revenue was $76.3 million versus $87.7 million in Q4 2019; operating income was $6.2 million versus $5.4 million, and net income was $6.5 million versus $5.5 million.
Material changes and unusual items
- COVID-19 campus closures and the shift to blended online instruction and hands-on labs disrupted student progress, starts and graduations. At year-end, approximately 5% of students had not returned for in-person labs and 28% were completing catch-up labs over an extended period. UTI deferred $6.1 million of revenue related to delayed course completion.
- Expense reductions, including lower compensation and professional-services costs, helped reduce the operating loss. Institutional HEERF funds offset $15.1 million of reported operating expenses; total institutional funds used in FY2020 were $15.7 million, including additional student grants.
- UTI raised approximately $49.2 million net from a February 2020 common-stock offering and invested part of the proceeds in short-term securities. The offering increased common shares outstanding.
- Adoption of lease accounting standard ASC 842 resulted in recognition of $144.7 million of operating lease right-of-use assets and $157.8 million of operating lease liabilities at September 30, 2020. FY2019 comparative figures were not recast.
Outlook, risks and contingencies
Management stated that operating cash flows, cash and short-term investments were expected to cover working capital, capital expenditures, commitments and existing operations for the next 12 months, while also supporting potential growth initiatives. The filing provides no quantified revenue or earnings guidance. Management was pursuing permanent approval for distance and blended learning formats and identified campus, program, acquisition and geographic expansion as growth options.
- Results in FY2021 could remain affected if students stay on leave, withdraw or delay completing required hands-on labs. Temporary distance-learning approvals were due to expire December 31, 2020, and permanent approvals were being pursued.
- Continued eligibility for Title IV and veterans’ aid is a material risk. UTI’s institutions derived 65%–68% of revenue under the 90/10 calculations; Texas was subject to a 30-day first-loan-disbursement delay based on cohort default rates. The company reported a composite score of 2.3, subject to ED review.
- Legal proceedings, investigations and claims arise in the ordinary course. The company said it could not estimate the possible loss range for pending matters; an adverse outcome could materially affect results or regulatory standing.
- Other disclosed risks include COVID-19, enrollment and employment conditions, competition, underused campus capacity, reliance on industry partners and proprietary student-loan collections.
- Series A preferred stock carries a 7.5% annual cash dividend; UTI paid $5.3 million in FY2020. Conversion could materially dilute common shareholders: the filing states the preferred stock is convertible into up to approximately 21.0 million common shares on a fully converted basis, subject to applicable caps and approvals.
Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor verification priorities
- Track student returns to in-person labs, catch-up completion, enrollment, starts and graduation trends, and whether deferred revenue converts to recognized revenue.
- Verify the sustainability of operating cash flow and profitability apart from HEERF reimbursements and the one-time CARES Act tax benefit.
- Monitor ED, accreditor and state approvals for blended learning, Title IV compliance, cohort default rates and HEERF spending.
- Review the collectability and performance of proprietary student loans, along with receivables and bad-debt trends.
- Assess potential preferred-stock conversion, dilution, dividend obligations and associated voting or governance rights.
- Review lease commitments and the outcome or development of legal and regulatory matters; the filing does not provide a clear estimate of potential losses.