Universal Technical Institute, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2018. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Business context
UTI provides postsecondary technical education through 12 U.S. campuses, including automotive, diesel, collision repair, motorcycle, marine, welding and CNC programs, as well as manufacturer-specific training. Tuition and fees are its primary revenue source. Many students rely on federal Title IV aid and veterans’ benefits.
Financial performance and liquidity
| Metric | Three months ended Mar. 31 | Six months ended Mar. 31 |
|---|---|---|
| Revenue, 2018 / 2017 | $80.7m / $82.5m | $161.8m / $166.7m |
| Operating income (loss), 2018 / 2017 | $(8.8)m / $0.7m | $(12.4)m / $2.1m |
| Net loss, 2018 / 2017 | $(8.8)m / $(1.7)m | $(10.0)m / $(3.5)m |
| Net loss per share, 2018 / 2017 | $(0.40) / $(0.12) | $(0.50) / $(0.25) |
| EBITDA, 2018 / 2017 (non-GAAP) | $(4.0)m / $5.6m | $(3.2)m / $11.9m |
Operating margin was negative 10.9% in the quarter and negative 7.7% for the six months, compared with positive 0.9% and 1.2%, respectively, in the prior-year periods. The filing does not present a conventional gross-margin measure.
- Cash flow: Operating cash use was $6.0m for the six months, versus $17.6m in 2017. Investing activities provided $41.2m, principally reflecting $40.9m of trading-security sale proceeds and $7.0m of investment maturities; capital expenditures were $7.6m. Financing activities used $3.2m, including $2.6m of preferred dividends.
- Cash and liquidity: Cash and equivalents were $82.2m at March 31, 2018, with $13.1m restricted cash and $0.7m of held-to-maturity investments. Current assets were $133.9m and current liabilities $87.3m. Management said available cash, investments and operating cash flows should meet requirements for the next 12 months.
- Debt-like obligations: Financing obligations totaled $42.6m, including $1.2m current. The company also had $38.8m of notes receivable from its proprietary student loan program, including $5.1m current; the loans carry credit and collection risk borne by UTI.
- Balance sheet: Total assets were $297.2m and shareholders’ equity $151.5m. Deferred revenue was $35.6m.
Material changes versus the prior comparable period
- Revenue declined 2.2% for the quarter and 2.9% for the six months. Average undergraduate full-time enrollment fell 4.4% and 5.2%, respectively. For the six months, student starts declined 3.5% to 3,135; tuition increases partly offset lower enrollment, while higher institutional discounts also weighed on revenue.
- SG&A rose $6.7m in the quarter and $11.7m for the six months, driven by compensation and bonuses, advertising, contract services and professional accounting costs. Educational services and facilities costs rose $1.0m in the quarter but declined $2.1m for the six months.
- UTI adopted ASC 606 on October 1, 2017 using the modified retrospective method. The opening adjustment increased equity by $37.2m. At March 31, adoption added $38.8m of notes receivable and $2.0m of deferred revenue relative to the former accounting; reported revenue was $0.5m higher for the quarter and $0.4m higher for the six months than under the prior method. The change relies on management estimates of loan collections.
- Unrestricted cash increased from $50.1m at September 30, 2017, largely reflecting liquidation of trading securities, rather than positive operating cash generation.
Outlook, management commentary and risks
- For FY2018, management expected new student starts to grow at a low-single-digit rate, weighted to the second half, while average student population was expected to decline in the mid-single digits. Revenue guidance was $310m–$320m, versus $324m in FY2017.
- Management forecast operating expenses of $348m–$353m, an operating loss of $28m–$33m and negative EBITDA. Planned capital expenditures were $24m–$25m, including about $11m for a new Bloomfield, New Jersey campus expected to open in fall 2018. Management expected real-estate rationalization to yield annualized savings of $2.5m–$3.0m beginning in 2019.
- A multi-year transformation plan was to be implemented over 12–18 months, with significant financial benefits expected beginning in FY2019. It includes investments in marketing, admissions and student services. A consulting agreement requires $9.3m over 16 months and allows up to approximately $4.7m in additional revenue- and savings-sharing fees.
- Key operating risks include declining enrollment, competition for prospective students, student price sensitivity and debt concerns, and reputational challenges affecting the education sector. Reliance on Title IV funding makes the business sensitive to federal aid regulation and certification requirements.
- All institutional Program Participation Agreements expired March 31, 2018. UTI had submitted renewal applications and said schools could continue participating while awaiting decisions; on April 25, 2018, the Houston institution and its Dallas/Fort Worth and Exton campuses received a four-year renewal. Other renewals remained relevant to monitor. Federal rulemaking on borrower defense, financial responsibility and gainful employment had ended without consensus.
- The Massachusetts Attorney General’s investigation concerning alleged false claims involving student aid remained unresolved; UTI reported no accrued liability and said the outcome and potential cost could not be predicted. UTI also maintained a full valuation allowance on deferred tax assets. Section 382 limitations may affect use of tax attributes and could require tax payments despite a pretax loss.
- UTI paid $2.6m in preferred dividends during the six-month period. Series A preferred stock has a $70m aggregate liquidation preference and a 7.5% annual cash dividend rate. Management said no material market-risk changes occurred; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether enrollment and new-start trends improve enough to support FY2018 revenue guidance and the projected FY2019 transformation benefits.
- Actual operating losses, cash burn and capital spending against guidance, including Bloomfield campus opening costs and consulting fees.
- Collection performance and assumptions underlying the $38.8m proprietary-loan receivable and ASC 606 revenue estimates.
- Status of remaining Title IV program renewals and developments in federal rules, accreditation and the Massachusetts investigation.
- Cash available after restricted balances, preferred dividends and planned investment, as well as the potential effect of preferred-stock rights and tax limitations.