Universal Technical Institute, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports fourth-quarter results for the three months ended September 30, 2014. Amounts below are in U.S. dollars.
Business context
UTI provides postsecondary technical education in automotive, diesel, collision repair, motorcycle and marine fields through 11 U.S. campuses, with additional manufacturer-sponsored training. Average undergraduate full-time enrollment was approximately 14,400, down 4.0% from 15,000 in FY2013. Tuition and fees accounted for approximately 98% of revenue. UTI reported that about 66% of FY2014 revenue, on the Department of Education’s cash-basis calculation, came from Title IV programs; veterans’ benefits accounted for about 20%.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $378.4 million | $380.3 million |
| Operating income | $6.3 million; 1.7% margin | $6.0 million; 1.6% margin |
| Net income | $2.0 million; 0.5% margin | $3.9 million; 1.0% margin |
| Diluted EPS | $0.08 | $0.16 |
| Cash from operations | $27.1 million | $26.7 million |
FY2014 revenue fell 0.5%. Lower enrollment reduced revenue by an estimated $15.2 million, partly offset by tuition increases of 2%–4% and a $2.0 million increase in industry-training revenue. Operating expenses declined 0.6%; SG&A fell 1.6%, while educational services and facilities expense rose 0.3%. The 64.6% effective tax rate included a $0.9 million noncash charge related to deferred tax assets for share-based compensation.
Fourth-quarter FY2014 revenue was $95.3 million, operating income $3.9 million and net income $1.6 million, compared with $95.8 million, $1.4 million and $0.9 million, respectively, in Q4 FY2013. Quarterly results are seasonal and can vary with enrollment patterns.
At year-end, cash and cash equivalents were $39.0 million, investments were $57.2 million, and restricted cash was $6.5 million. Management reported $84.9 million of cash and cash equivalents plus current investments. Working capital was $25.2 million, versus $41.4 million a year earlier. UTI reported no short- or long-term borrowings; its balance sheet included a $37.7 million financing obligation, principally associated with the Lisle campus lease. Operating lease commitments totaled $197.3 million; total contractual commitments were $304.9 million.
Operating cash flow was $27.1 million; investing activities used $9.2 million and financing activities used $13.5 million. FY2014 cash returned to shareholders included $9.9 million of dividends and $1.4 million of share repurchases. The quarterly dividend was $0.10 per share. EBITDA, a company-reported non-GAAP measure, was $29.1 million versus $29.9 million in FY2013.
Changes, outlook and notable items
- Enrollment and new student starts weakened: starts fell 9.3% to approximately 13,600 in FY2014. Management cited economic conditions, financing affordability, competition and regulatory constraints.
- Management expected FY2015 starts and average enrollment to decline by a mid-single-digit percentage and revenue to decrease approximately 3%–4%. It expected operating-income growth excluding an estimated $5 million–$6 million pretax negative impact from opening the Long Beach campus. Planned FY2015 capital expenditures were approximately $24 million, including about $13 million for the new campus.
- Two restructuring phases were expected to produce approximately $9.4 million in combined compensation-cost savings in FY2015. The company also anticipated higher advertising expense, at 11%–12% of revenue.
- UTI revised previously issued financial statements for immaterial errors, including omitted retake revenue and related bad-debt adjustments, certain contract-services expense, and cash/restricted-cash classification. The filing states the corrections were not material to the affected periods.
- UTI’s proprietary student-loan program carries collection risk. Because collectability was not considered reasonably assured, the company recognized related tuition and interest as cash was collected; $23.2 million of tuition associated with the program was excluded from FY2014 revenue. The reported ending balance of loans and related accrued amounts not recognized on the balance sheet was $70.8 million.
- New federal gainful-employment rules were published October 31, 2014 and were scheduled to take effect July 1, 2015. UTI said it could not reliably estimate the impact; programs that fail the applicable debt-to-earnings standards could lose Title IV eligibility. Massachusetts’ new school regulations changed recruitment practices, with the ultimate operating impact uncertain.
- A Massachusetts Attorney General investigation concerning alleged claims related to student loans, guarantees and grants remained unresolved. UTI reported no contact since a February 2013 follow-up request and recorded no liability because the outcome and costs could not be predicted.
Investor verification priorities
- Track enrollment, starts, retention and graduate employment outcomes; the reported employment rate was 88% for 2013 graduates, using the company’s stated methodology.
- Monitor FY2015 revenue and operating-income performance against management’s outlook, including Long Beach opening costs, capital spending and restructuring savings.
- Assess exposure to Title IV and veterans’ funding, gainful-employment compliance, student-loan defaults, and the campus nearing the VA’s 35% benefit-recipient limit.
- Review proprietary-loan collections and unrecognized exposures, as well as lease and financing-obligation commitments.
- Follow the Massachusetts investigation, state and accreditation reporting requirements, and the implementation and effects of new federal and Massachusetts rules.
- Consider the FY2014 financial-statement revision and its disclosed scope when comparing results across periods.