Universal Technical Institute, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2017; filed August 4, 2017. Amounts below are U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
UTI provides postsecondary technical education through 12 U.S. campuses, with programs in automotive, diesel, collision repair, motorcycle and marine fields, as well as manufacturer-sponsored training. Student tuition is the primary revenue source, and many students rely on Title IV and veterans’ benefits funding.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $76.3 | $82.3 | $242.9 | $260.2 |
| Operating loss | $(2.8) | $(5.5) | $(0.7) | $(13.4) |
| Net loss | $(3.9) | $(5.1) | $(7.4) | $(38.8) |
| Net loss per share | $(0.21) | $(0.21) | $(0.46) | $(1.60) |
| Operating margin | (3.7)% | (6.6)% | (0.3)% | (5.2)% |
| EBITDA, non-GAAP | $2.1 | $(0.6) | $14.1 | $1.7 |
- Revenue fell 7.3% in the quarter and 6.6% year to date. Average undergraduate full-time enrollment declined 9.9% in the quarter and 10.7% year to date.
- Operating cash flow was $(29.8) million for the nine months, versus $(10.8) million a year earlier. Investing activities used $50.8 million, including $41.6 million for trading securities and $9.7 million for held-to-maturity investments. Capital expenditures were $6.5 million.
- At June 30, cash and cash equivalents were $35.1 million; trading securities and current held-to-maturity investments brought cash and current investments to approximately $84.3 million. Restricted cash was $13.6 million. Total current assets were $127.6 million and current liabilities were $66.6 million.
- Financing obligations totaled approximately $43.4 million, including $1.1 million current. Total liabilities were $129.5 million. Cash and cash equivalents had declined from $119.0 million at September 30, 2016, partly reflecting investment purchases.
Material changes and management commentary
- Despite lower revenue, operating losses improved, primarily due to lower compensation and other costs following workforce reductions and efficiency measures. The Financial Improvement Plan was expected to deliver annualized savings at the higher end of its $30–$40 million range for fiscal 2017.
- Quarterly student starts rose 12.5% year over year to approximately 1,800; nine-month starts were down 12.3% to approximately 5,000. Management cited employment conditions, affordability and student borrowing concerns, negative industry perceptions, and competition as enrollment challenges.
- The nine-month net loss improved substantially from 2016, when a $29.4 million valuation-allowance charge contributed to tax expense. UTI recorded a further $5.9 million valuation-allowance-related tax expense in the 2017 nine-month period; the tax provision was $5.7 million despite a pretax loss.
- Preferred-stock dividends were $3.9 million for the nine months. The Series A preferred stock carries a 7.5% annual cash-dividend rate; unpaid dividends increase its liquidation preference under the agreement.
Outlook, risks and contingencies
- For fiscal 2017, management expected revenue to decline by a mid-to-high single-digit percentage, average student population to be down by a low-double-digit percentage, and new starts to decline by a mid-to-high single-digit percentage. Fourth-quarter starts were expected to range from slightly up to slightly down year over year.
- Management projected fiscal 2017 operating results between $1.0 million of operating income and $1.0 million of operating loss, significantly improved EBITDA versus fiscal 2016, and capital expenditures of $10.5–$11.5 million. It stated cash, investments and operating cash flows were expected to meet requirements for the next 12 months.
- The proprietary student loan program leaves UTI with credit and collection risk. At June 30, program balances of $70.2 million, including loans and related amounts, were not recognized on the balance sheet; $12.9 million was written off during the nine months. Tuition and interest are recognized when collected because collectability is not considered reasonably assured.
- Regulatory and accreditation matters include Long Beach campus accreditation findings, a Norwood program below a graduation benchmark, a Sacramento program below an employment benchmark, and a Houston program under heightened monitoring. UTI said it planned to respond to ACCSC findings; accreditation or Title IV eligibility could be affected if remediation is inadequate.
- Nine of 12 programs passed the first final gainful-employment debt-to-earnings rates; three were in the zone. Arizona’s UTI institution remained provisionally certified pending an open Department of Education review, with approval required for new locations or programs. Changes to federal rules and recertification remain uncertainties.
- A Massachusetts Attorney General investigation concerning student loans, guarantees and grants remained unresolved; UTI reported no recorded liability and said the outcome and potential costs could not be estimated. The filing also notes that pending legal proceedings could materially affect results or financial condition.
Key facts for investors to verify
- Whether enrollment, starts and revenue trends met management’s fiscal 2017 expectations, and whether projected cost savings and operating results were achieved.
- Cash generation and liquidity, including the composition and liquidity of investments, restricted cash needs, and the effect of ongoing operating cash outflows.
- Performance and collectability of the proprietary loan portfolio, including the unrecognized $70.2 million balance and write-offs.
- Resolution of ACCSC findings, campus and program outcomes, Arizona provisional certification, and future Title IV and gainful-employment requirements.
- Future tax-valuation-allowance judgments, preferred-stock dividend obligations, and the status and potential exposure of the Massachusetts investigation.