Universal Technical Institute, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015; unaudited. The company operates 11 U.S. campuses providing postsecondary technical education and manufacturer-specific training.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $91.2 million, down 3.7% year over year | $186.9 million, down 2.5% |
| Operating income | $2.4 million, versus a $1.6 million loss | $8.0 million, versus $1.4 million |
| Operating margin | 2.6%, versus (1.7%) | 4.4%, versus 0.7% |
| Net income | $0.6 million, versus a $1.6 million loss | $3.6 million, versus $0.1 million |
| Net margin | 0.6%, versus (1.7%) | 2.0%, versus approximately zero |
| EBITDA (non-GAAP) | $7.8 million, versus $4.2 million | $18.9 million, versus $13.1 million |
Revenue fell primarily as enrollment declined, partly offset by tuition increases of 2%–4%. Average undergraduate full-time enrollment declined 8.8% for the quarter and 6.7% for the half-year. Student starts fell 12.9% and 15.1%, respectively. Lower compensation, advertising (quarterly), and bad-debt costs helped improve operating results. Six-month operating expenses were $178.9 million, down from $190.3 million.
Cash flow and liquidity: Six-month operating cash flow was $8.7 million, down from $16.1 million. Investing used $20.0 million, including $16.2 million for property and equipment; financing used $11.4 million, mainly for $6.1 million of share repurchases and $4.9 million of dividends. Cash and cash equivalents were $16.4 million at March 31, versus $39.0 million at September 30, 2014. Cash plus current investments totaled approximately $64.6 million. Total assets were $271.9 million; current liabilities were $91.0 million. Financing obligations totaled approximately $32.8 million; the filing does not identify conventional borrowings as a material balance-sheet item.
Changes, outlook, and material items
- Full-year fiscal 2015 guidance was relatively unchanged: revenue expected to decline approximately 3%–4%; new starts and average student population expected to be down in the mid-single digits. Management expected year-over-year growth in applications and starts in the second half, with all such growth in the fourth quarter. Excluding new-campus pre-opening costs, operating income was expected to grow year over year.
- Capital expenditures were expected to be approximately $35 million for fiscal 2015. Management anticipated $13–$14 million in additional capital spending in the second half. The Long Beach campus was expected to incur a further $3.9–$4.3 million in operating expenses during the fiscal year and become profitable in 2016.
- Cash generation and quarterly results are affected by enrollment seasonality and timing of student financial-aid disbursements. Management said cash, investments, and operating cash flows were expected to meet working-capital and capital needs for the next 12 months.
- The company purchased most of its Houston campus buildings and land for $9.4 million in March. Long Beach construction was underway under a 15-year build-to-suit lease, with the company bearing substantially all construction-period risk. Orlando began teaching diesel and industrial programs in January 2015.
- In April, the company agreed to acquire Roush Yates performance-engine curriculum and related rights for $0.3 million initially, with additional milestone and potential earn-out payments. It also disclosed a trademark license agreement with maximum fees of $2.3 million over seven years.
- A roughly $1.0 million bad-debt expense reversal in the quarter related to prior-period student-fund processing matters after the company concluded repayment was no longer probable. The six-month effective tax rate was 51.5%; stock-compensation tax accounting contributed to elevated and potentially variable tax expense.
- The proprietary student loan program places credit and collection risk on the company. At March 31, outstanding program balances, including accrued interest and fees, were $74.7 million and were not recorded on the balance sheet because collectability was not reasonably assured. Six-month amounts written off were $6.2 million.
Risks, contingencies, and other disclosures
- Students’ reliance on Title IV and veterans’ aid, access to supplemental financing, competition, enrollment trends, and negative sector publicity pose risks to student starts and revenue. Management cited stronger competition, student price sensitivity, and employment options as enrollment challenges.
- The Massachusetts Attorney General’s investigation concerning alleged false claims involving student aid at the Norwood campus remained unresolved. The company said it could not predict its scope or outcome and recorded no liability. It also noted that pending legal matters could materially affect results, cash flows, or financial condition, but a loss estimate was not available.
- The Department of Education completed a site visit for its Title IV program review of the Avondale campus in April 2015; the company expected an initial report in approximately 75 days.
- The company reported no material changes to previously disclosed risk factors other than added competition-related risks, and no material changes in market risk. Management concluded disclosure controls were effective as of March 31, 2015.
- Prior-period 2014 financial statements were revised for immaterial corrections involving retake revenue, bad-debt expense, contract-services expense, and cash/restricted-cash classification.
Key facts for investors to verify
- Whether applications and student starts improved as expected in the second half, particularly in the fourth quarter, and how enrollment affected revenue.
- Progress and spending at the Long Beach campus, including whether opening costs and the expected 2016 profitability remain on plan.
- Cash flow, capital spending, dividends and repurchases, and the company’s capacity to fund its student-loan program and campus investments.
- Collections, defaults, and write-offs in the proprietary loan program, including the unrecognized $74.7 million balance.
- Developments in the Massachusetts investigation and the Department of Education’s Title IV review, and any resulting financial or operational consequences.