Universal Technical Institute, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; amounts below are in U.S. dollars. The company provides postsecondary technical education through 12 U.S. campuses and manufacturer-sponsored training programs. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Revenue | $81.2 million | $84.2 million |
| Operating income (loss) | $(3.6) million | $1.4 million |
| Operating margin | (4.5)% | 1.7% |
| Net income (loss) | $(1.1) million | $(1.7) million |
| Net loss per share | $(0.10) | $(0.12) |
| EBITDA, non-GAAP | $0.8 million | $6.3 million |
| Cash used in operating activities | $2.6 million | $17.4 million |
Revenue fell 3.6%, principally because average undergraduate full-time enrollment declined 5.8%, partly offset by tuition increases of up to 2%. Educational services and facilities expense decreased $3.1 million, but selling, general and administrative expense rose $5.0 million, including higher advertising, contract services, and professional accounting costs. The operating result shifted from profit to loss; the smaller net loss reflected a $2.8 million income tax benefit, including a valuation-allowance release following the Tax Cuts and Jobs Act.
At December 31, cash and cash equivalents were $86.5 million and current investments were $6.8 million, totaling $93.3 million; restricted cash was an additional $14.1 million. Current assets were $141.3 million versus current liabilities of $83.7 million. Total liabilities were $142.0 million. Financing obligations totaled approximately $42.9 million, including $1.2 million current; the filing does not report conventional borrowings as a separate debt balance. Operating cash outflow improved year over year. Investing activities provided $39.2 million, largely from $40.9 million of proceeds from selling trading securities, rather than recurring operating cash generation.
Material changes and unusual items
- Student starts were approximately 1,300, down 7.1% year over year; average undergraduate full-time enrollment was approximately 11,300, down 5.8%.
- Effective October 1, 2017, the company adopted ASC 606 using the modified retrospective method. The change primarily accelerates recognition of revenue related to its proprietary student loan program and created notes receivable. The opening retained-earnings adjustment was approximately $37.2 million; at December 31, notes receivable totaled $40.3 million. For the quarter, reported revenue was $146,000 higher than it would have been under the prior standard.
- The Tax Cuts and Jobs Act prompted reassessment of deferred taxes and release of approximately $2.8 million of valuation allowance. Section 382 limits on certain tax attributes may constrain their use.
- Preferred stock dividends were $1.3 million for the quarter. Series A preferred stock has a 7.5% annual cash dividend rate, with an additional 2% annual increase to the liquidation preference if the cash dividend is not paid.
Outlook, risks, and contingencies
For fiscal 2018, management expects new student starts to grow in the low single digits, weighted toward the second half, while average student population is expected to decline in the mid-single digits. Revenue guidance is $310–$320 million, operating expenses $340–$345 million, and operating loss $20–$25 million; management also expects negative EBITDA. Planned capital expenditures are $24–$25 million, including approximately $11 million for a Bloomfield, New Jersey campus expected to open in fall 2018. Management expects $3–$4 million of annualized real-estate cost savings beginning in 2019.
Management believes cash, investments, and operating cash flows will meet liquidity needs for at least the next 12 months. Key operating challenges cited include increased competition for students, price sensitivity and reluctance to incur education debt, lower unemployment, and negative industry perceptions. The company bears credit and collection risk on its proprietary student loans; these loans generally carry interest rates of 7%–10% and defer required payments until six months after a student completes or withdraws.
All current Title IV Program Participation Agreements were due to expire March 31, 2018. Recertification applications were submitted on time, allowing continued participation while the Department of Education considers them. The Long Beach campus received continuing accreditation with a stipulation; the company submitted its response and revised leave-of-absence policy in January 2018. A Massachusetts Attorney General investigation concerning alleged false claims related to student aid remains unresolved; the company has recorded no liability and cannot estimate its scope, outcome, or cost. The company also disclosed that pending legal matters generally could adversely affect its business, cash flows, results, or financial condition.
Important facts for investors to verify
- Whether enrollment and student starts recover as projected, and the effect of continued enrollment declines on revenue and operating losses.
- Whether fiscal 2018 revenue, operating-loss, EBITDA, and capital-spending guidance remains achievable, particularly with the planned campus opening and program expansion.
- The collection performance and assumptions underlying the proprietary loan portfolio, including the $40.3 million receivable balance and the company’s associated credit risk.
- The status and outcome of Title IV recertification, the Long Beach accreditation stipulation, and the Massachusetts Attorney General investigation.
- The sustainability of liquidity and cash generation, distinguishing operating cash flow from proceeds of investment sales.
- The effects of ASC 606 estimates, tax-asset realizability, and Section 382 limitations on future reported earnings and tax payments.