Universal Technical Institute, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017; unaudited. The company provides postsecondary technician training at 12 U.S. campuses, along with manufacturer-specific training. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $82.5, down 6.5% year over year | $166.7, down 6.3% |
| Operating income (loss) | $0.7 vs. $(5.8) | $2.1 vs. $(8.0) |
| Operating margin | 0.8% vs. (6.5%) | 1.2% vs. (4.5%) |
| Net loss | $(1.7) vs. $(32.0) | $(3.5) vs. $(33.7) |
| Loss per share | $(0.12) vs. $(1.32) | $(0.25) vs. $(1.39) |
| EBITDA, non-GAAP | $5.6 vs. $(0.6) | $11.9 vs. $2.3 |
Lower enrollment weighed on revenue: average undergraduate full-time enrollment fell 10.7% in the quarter and 10.2% year to date. New student starts declined 17.4% in the quarter and 22.0% for the six months. Tuition increases of up to 3%, Long Beach campus growth and higher industry-training revenue partly offset the decline.
Operating performance improved principally as compensation, advertising, supplies and maintenance, depreciation and amortization, travel, and legal costs fell. The prior-year net losses included a $27.9 million increase in tax expense from a valuation allowance on deferred tax assets. The company recorded additional valuation allowance-related tax expense in 2017; reported tax expense was $2.1 million for the quarter and $4.8 million year to date. Preferred-stock dividends were $1.3 million and $2.6 million, respectively, reducing loss available for distribution to common and preferred holders.
For the six months, operating cash flow was $(17.6) million, versus $(2.5) million a year earlier; investing cash flow was $(9.4) million and financing cash flow was $(3.1) million. Cash and cash equivalents were $89.0 million at March 31, down from $119.0 million at September 30, 2016. Cash, cash equivalents and current investments totaled $98.0 million; restricted cash was a further $14.7 million. Management said existing cash, investments and operating cash flows were expected to meet needs for the next 12 months. Capital spending was $3.9 million year to date, with full-year spending expected at $10–11 million.
Total liabilities were $142.7 million, including $43.6 million of financing obligations ($1.0 million current). The filing reports no conventional borrowing balance. Working capital was approximately $64.5 million, based on current assets of $143.0 million and current liabilities of $78.5 million.
Material changes, outlook and risks
- Outlook: For fiscal 2017, management expects new student starts to decline by a high-single-digit percentage and average student population to fall by a low-double-digit percentage versus fiscal 2016. Revenue is expected to decline by a mid-to-high-single-digit percentage. Operating results are forecast between $1 million of income and $1 million of loss; potential additional success-based marketing investment may drive a loss. Management expects significantly improved EBITDA versus fiscal 2016.
- Cost plan: The Financial Improvement Plan is now expected to deliver annualized savings at the high end of its $30–40 million range for fiscal 2017. Workforce reductions and changes to marketing and admissions are among the measures.
- Programs and growth: Management planned welding and CNC machining programs for 2017 and associate-degree offerings at two California campuses in Q3. It began an 18-week manufacturer-paid INFINITI technician program in March.
- Student finance: Under its proprietary loan program, the company bears credit and collection risk and recognizes tuition and related income only when collected. For the six months, $11.2 million of tuition and interest income was excluded before $3.9 million collected and recognized. The unrecognized program balance was $73.8 million; cumulative commitments since inception were approximately $148.2 million.
- Regulatory and legal exposure: The Arizona institution remained on provisional Title IV certification through March 31, 2018, requiring prior approval for new locations and programs; an open federal review had not produced a report. The company’s 2016 composite score of 1.7 removed Heightened Cash Monitoring 1 restrictions, but monitoring information was still being provided. Nine of 12 programs passed the initial gainful-employment rates; three were in the zone. Massachusetts rules require business-practice changes. Arizona requested a $3.0 million surety bond in April 2017. A Massachusetts Attorney General investigation concerning the Norwood campus remained unresolved; no liability was recorded and the potential outcome could not be estimated.
- Other notable items: In April 2017, after quarter-end, the company invested $40.0 million in bond funds classified as trading securities. It paid a $2.6 million Series A preferred dividend during the six-month period; the preferred stock carries a 7.5% annual cash dividend rate. The common-stock dividend had been eliminated in 2016.
Most important facts for investors to verify
- Whether new starts and enrollment stabilize, given their declines and management’s fiscal-year assumptions.
- Whether cost reductions can offset lower revenue while funding planned marketing, programs and campus growth.
- Cash conversion and liquidity, especially the $17.6 million operating cash outflow, restricted cash needs and student-loan credit exposure.
- Progress on Arizona Title IV recertification, the open federal review, gainful-employment outcomes and state compliance obligations.
- Whether the $40.0 million post-quarter bond-fund investment, investment risks and preferred-dividend obligations affect available liquidity.
- Resolution and potential financial effect of the Massachusetts investigation and other legal or regulatory proceedings; the filing does not provide a clear estimate of possible losses.