Universal Technical Institute, Inc. — Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2019. The company provides postsecondary technical education through 13 U.S. campuses and manufacturer-sponsored training programs. Financial amounts below are in millions unless otherwise stated.
Financial performance and position
- Quarter revenue: $79.0, up 5.5% from $74.9 a year earlier. Operating loss narrowed to $0.5 from $11.8; net loss was $0.4 versus $11.7. Operating margin was approximately (0.6)% versus (15.7)%. EBITDA, a non-GAAP measure, was $4.4 versus a loss of $7.2.
- Nine-month revenue: $243.8, up 3.0% from $236.7. Operating loss narrowed to $13.2 from $24.2; net loss was $13.3 versus $21.7. EBITDA was $1.2 versus a loss of $10.4. Net loss per share was $0.68 versus $1.02.
- Drivers and costs: Management attributed revenue growth to higher enrollment, tuition increases of up to 2.5% by program, and the Bloomfield, New Jersey campus. Average undergraduate full-time enrollment rose 1.8% for the nine-month period to 10,562; student starts increased 11.4% to 5,215. Lower SG&A and educational-services costs improved operating results.
- Cash flow: Operating cash use was $7.1 for the nine months, compared with $22.5 in 2018. Investing cash use was $5.1, including $5.3 of property and equipment purchases; financing cash use was $3.7, primarily preferred dividends and financing-obligation payments. Cash, cash equivalents and restricted cash decreased $15.9 to $56.2.
- Liquidity and obligations: June 30 cash and cash equivalents were $42.7, with restricted cash of $13.5. Working capital was approximately $15.8 ($89.8 current assets less $74.0 current liabilities). Financing obligations totaled approximately $41.1, including current and long-term portions. The company reported no credit facility or bank debt. Total liabilities were $133.4 and shareholders’ equity was $110.7.
- Preferred stock: The 700,000 Series A shares carry a $100-per-share liquidation preference and a 7.5% annual cash dividend rate. Nine-month preferred dividends were $3.9; $1.3 was accrued at June 30. The preferred stock is convertible and was excluded from diluted loss per share as anti-dilutive.
Changes, outlook and risks
- Results improved year over year, but the company remained loss-making for both the quarter and nine-month period. Prior-year comparisons included a $1.2 impairment charge for a small business, absent in 2019, as well as different campus-opening and transformation-plan costs.
- Management said existing cash and operating cash flows should meet working-capital, capital-expenditure and other needs for the next 12 months. It expected fiscal 2019 capital expenditures of $6–$7 million. No specific revenue or earnings guidance was provided.
- The company stopped accepting applications at its Norwood, Massachusetts campus; the last student group began in March 2019, and closure is expected in fall 2020. Management expects the exit to improve annual pretax income, EBITDA and cash flow after completion. Estimated postemployment benefits associated with the closure are approximately $0.9 million. The company intends to teach out enrolled students.
- Norwood’s closure may trigger Department of Education financial-responsibility review or a letter-of-credit requirement; the company had notified the Department in May and had not received a response by the filing. Campus closure also presents potential student-loan discharge exposure if teach-out arrangements do not succeed.
- Regulatory and accreditation matters remain relevant: Orlando had two accreditation findings and was awaiting a reaccreditation decision; Phoenix had one finding and a response deadline in August 2019. Federal student-aid rules, state authorization requirements and proposed California legislation could affect compliance costs or operations. The company had begun early implementation of the federal rule rescinding gainful-employment regulations.
- Legal claims and proceedings arise in the ordinary course; the filing says potential losses cannot currently be estimated and that outcomes could materially affect results or financial condition. The company also expects the new lease standard to have a material financial-statement impact.
Important facts for investors to verify
- Whether increased starts and enrollment translate into sustained revenue growth, retention and graduate employment outcomes.
- Cash conversion and liquidity, particularly the impact of student-start timing and deferred revenue on operating cash flow.
- Department of Education response to the Norwood closure notice, including any financial-responsibility or letter-of-credit conditions, and the effectiveness of the student teach-out.
- Accreditation outcomes for Orlando, Phoenix and other campuses, and any resulting operational or Title IV eligibility effects.
- Actual fiscal 2019 capital spending and the balance-sheet impact of adopting the lease-accounting standard.
- Preferred-stock dividend requirements, conversion dilution and any additional material legal or regulatory exposures.