Business context and reporting period
Universal Technical Institute, Inc. (UTI) filed this Form 10-K for the fiscal year ended September 30, 2016. UTI operates 12 U.S. campuses offering technician education in automotive, diesel, collision repair, motorcycle and marine fields, plus manufacturer-sponsored training. Revenue is primarily tuition and fees; approximately 98% of revenue in each of fiscal 2014–2016 was tuition.
The filing is an annual report, not a standalone fourth-quarter report. Where available, fourth-quarter results are identified separately below. Financial amounts are in U.S. dollars.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $347.1 million | $362.7 million |
| Operating income (loss) | ($18.6 million) | ($9.2 million) |
| Operating margin | (5.4%) | (2.5%) |
| Net income (loss) | ($47.7 million) | ($9.1 million) |
| Net margin | (13.7%) | (2.5%) |
| Adjusted EBITDA, non-GAAP | $0.8 million | $24.1 million |
| Cash from operating activities | $7.4 million | $8.2 million |
| Capital expenditures | $7.5 million | $29.0 million |
| Average undergraduate full-time enrollment | Approximately 12,000 | Approximately 13,200 |
Revenue fell 4.3%, while average enrollment declined 9.1%. Management attributed the revenue pressure principally to lower enrollment, partly offset by tuition increases of up to 3% and one additional revenue-earning day. Operating expenses totaled $365.8 million, exceeding revenue. The 2016 net loss included a $34.2 million tax expense from a full valuation allowance on deferred tax assets; the company cited cumulative losses, weaker enrollment indicators and a challenging industry environment as evidence supporting the allowance.
Fiscal fourth-quarter revenue was $86.9 million, operating loss was $5.2 million and net loss was $8.9 million. FY 2016 operating margin and net margin above are calculated from reported figures. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
Liquidity, capital and obligations
At September 30, 2016, UTI had $119.0 million of cash and cash equivalents, $1.7 million of current investments and $6.0 million of restricted cash. Working capital was $67.4 million, compared with $11.6 million a year earlier. The company reported no short- or long-term borrowings. It did report $44.1 million in financing obligations, principally associated with campus build-to-suit leases; total liabilities were $160.5 million.
Cash and cash equivalents increased by $89.6 million during the year, reflecting $68.9 million of net proceeds from issuing Series A preferred stock, as well as investment maturities and operating and investing cash flows. UTI sold 700,000 preferred shares to Coliseum for $70.0 million gross proceeds, with a $100 per-share liquidation preference and a 7.5% annual cash dividend rate; if unpaid, the stated accrued rate is 9.5%. Preferred dividends paid in FY 2016 were $1.4 million. Common-stock dividends were eliminated in June 2016. Contractual commitments totaled $271.4 million, including $155.3 million of net operating-lease commitments and $83.5 million of other long-term obligations.
Changes, outlook and material risks
- Enrollment and profitability: Average enrollment has declined annually in the selected data from 16,500 in FY 2012 to 12,000 in FY 2016. FY 2016 operating loss widened from the prior year; adjusted EBITDA fell to $0.8 million from $24.1 million.
- Cost actions and outlook: UTI implemented a workforce reduction and broader Financial Improvement Plan. Management expects $25–$30 million of annualized savings. For FY 2017, it projected starts down in the low single digits, average enrollment down in the mid-to-high single digits, revenue down in the low-to-mid single digits, approximately breakeven operating income and positive EBITDA. Expected capital expenditures were $12.5–$13.5 million.
- Title IV dependence and oversight: Approximately 72% of FY 2016 cash-basis revenue under the 90/10 rule came from Title IV programs; another approximately 19% came from veterans’ benefits. Following review of FY 2015 financial statements, ED allowed UTI to use the Zone Alternative rather than post a letter of credit equal to 50% of Title IV funds. UTI began Heightened Cash Monitoring 1 disbursements in October 2016 and provides ED monthly student rosters and biweekly cash-flow projections. Management calculated a FY 2016 composite score of 1.7, but ED’s determination was pending.
- Program outcomes and approvals: ED’s draft gainful-employment debt-to-earnings rates showed nine of 12 programs passing and three in the zone, with none failing; final rates were expected in early 2017. Twelve of approximately 244 approved programs did not meet ACCSC graduation-rate requirements, while all met employment-rate requirements. Exton campus accreditation renewal was pending at the filing date.
- Other operating and regulatory risks: New federal rules effective generally July 1, 2017 expand borrower-defense procedures and circumstances that may trigger financial protection requirements. Other risks include changes to Title IV or veterans’ funding, student financing and loan collections, competition and affordability, underutilized campus capacity, and the ability to maintain OEM relationships. The Massachusetts Attorney General investigation concerning the Norwood campus remained unresolved; UTI had not accrued a liability and reported no further request since April 2015.
- Unusual items and governance: UTI recorded a $0.8 million impairment of its Pro-MECH investment; there was no goodwill impairment in FY 2016 (FY 2015 included a $12.4 million goodwill impairment). Coliseum’s preferred stock includes voting rights and approval rights over specified corporate actions; its voting power could increase substantially if required approvals are obtained.
Most important facts for investors to verify
- Whether ED confirms UTI’s FY 2016 composite score and whether HCM1 monitoring or other financial-responsibility conditions continue.
- Final and subsequent gainful-employment rates, and the potential Title IV eligibility implications for programs currently in the zone.
- Whether the $25–$30 million savings plan is achieved and whether enrollment and revenue stabilize against management’s FY 2017 outlook.
- The cash-generating and credit performance of the proprietary student-loan program, including its unrecognized balance and collections; the filing reports $75.5 million outstanding at FY-end under the program’s disclosed activity schedule.
- Developments in the Massachusetts investigation, pending campus accreditation renewal and other regulatory reviews, and the impact of new federal rules on required collateral or liquidity.
- The preferred stock’s dividend burden, conversion and voting provisions, and any future effect on common-stock dilution or corporate control.