Universal Technical Institute, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are to the three months ended December 31, 2015 unless stated otherwise. Financial amounts below are in millions of dollars unless noted. UTI provides postsecondary technical education through 12 U.S. campuses, alongside manufacturer-specific training.
Financial results and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $84.2 | $89.8 |
| Operating income (loss) | $1.4 | $(2.2) |
| Operating margin | 1.7% | (2.4)% |
| Net loss | $(1.7) | $(1.7) |
| Loss available for distribution, after preferred dividends | $(3.0) | $(1.7) |
| Basic and diluted loss per share | $(0.12) | $(0.07) |
| EBITDA (company-reported, non-GAAP) | $6.3 | $2.9 |
| Cash used in operating activities | $(17.4) | $(3.6) |
Revenue fell 6.2%. Average undergraduate full-time enrollment declined 9.8% to approximately 12,000, and starts fell 22.2% to approximately 1,400. Revenue was also reduced by one fewer earning day; tuition increases of up to 3% partly offset these effects. Operating results improved as lower compensation, advertising, supplies, maintenance, and training-aid costs more than offset lower revenue. Postsecondary Education revenue was $80.5 million, down from $86.7 million; Other revenue was $3.6 million, up from $3.1 million.
Net loss remained similar year over year despite the operating improvement, in part because income tax expense was $2.6 million versus a $0.9 million benefit. The current-period provision included a $2.1 million increase in the deferred-tax valuation allowance; the company says certain anticipated future deductions are subject to a full valuation allowance.
At December 31, cash and cash equivalents were $102.9 million, restricted cash was $15.1 million, and current investments were $1.0 million. Current assets were $149.6 million and current liabilities $83.2 million. Total liabilities were $148.0 million and shareholders’ equity $134.1 million. Financing obligations totaled approximately $43.8 million, including current and long-term portions. No conventional borrowings are identified in the presented balance sheet.
Operating cash outflow increased to $17.4 million, largely reflecting working-capital movements, including a $12.6 million outflow from accounts payable and accrued expenses and an $11.1 million increase in restricted cash. The latter primarily reflects $11.5 million of surety-bond collateral. Investing activities provided $1.4 million and financing activities used $0.2 million. The company reported $103.8 million of cash, cash equivalents, and current investments, excluding restricted cash, and said existing resources and operating cash flows should cover needs for the next 12 months.
Material changes and notable items
- SG&A declined $6.7 million to $35.6 million, including lower compensation and advertising costs. Educational services and facilities expense fell $2.5 million to $47.2 million.
- Long Beach campus revenue rose to $4.2 million from $1.9 million as the campus continued to ramp up.
- In September and November 2016, UTI reduced its workforce by approximately 70 and 75 employees, respectively. It recorded approximately $1.3 million in postemployment benefit charges in the quarter.
- Series A preferred dividends of $1.3 million were accrued. The preferred stock has a 7.5% annual cash-dividend rate; UTI eliminated its common-stock quarterly dividend in June 2016.
- UTI’s proprietary student loan program carries credit and collection risk for the company. At quarter-end, related loans and accrued amounts not recognized on the balance sheet totaled $76.6 million. Net tuition and interest income excluded during the quarter was $4.2 million; amounts actually collected and recognized were $1.8 million.
Outlook, risks, and contingencies
For FY2017, management expected new starts to decline by a high-single-digit percentage and average student population to decline by a low-double-digit percentage versus FY2016. It expected revenue to decline by a mid-single-digit percentage, partly offset by tuition increases. The Financial Improvement Plan was expected to deliver more than $30 million of annualized cost savings and support positive operating income and significantly improved EBITDA despite lower revenue. Planned FY2017 capital expenditures were $12.5 million to $13.5 million.
- Management cited employment conditions, student and family sensitivity to education costs and debt, negative perceptions of the education sector, and increased competition as pressures on student starts.
- Nine of 12 educational programs achieved passing results under the first gainful-employment debt-to-earnings rates; the other three were in the “zone.” UTI Arizona remained provisionally certified through March 31, 2018, based on an open Department of Education review. New locations and programs at that institution require prior approval for Title IV aid.
- New Massachusetts proprietary-school rules introduce disclosure and business-practice requirements, with implementation dates through January 1, 2018. UTI said it was working toward compliance.
- Two Rancho Cucamonga programs had not met graduation benchmarks and were placed on outcomes reporting. Planned replacement curricula in 2017 are subject to state approval.
- A Massachusetts Attorney General investigation concerning allegations related to student loans, guarantees, grants, and graduate-employment practices remained unresolved. UTI had recorded no liability and could not estimate the eventual scope, outcome, or costs. The filing warns that pending proceedings could materially affect the business, cash flows, results, or financial condition.
- Section 382 limitations may restrict use of tax deductions and losses, reduce potential tax refunds, or require tax payments even in periods with pre-tax losses. UTI also cautioned that results are seasonal and that quarterly results are not necessarily indicative of the full year.
Most important facts for investors to verify
- Whether enrollment and new-start declines stabilize, and whether management achieves the projected FY2017 revenue and cost-saving outcomes.
- Whether operating cash use improves, particularly after the surety-bond collateralization and other working-capital movements.
- The effect of the proprietary loan program’s unrecognized balances, collection performance, and credit exposure on future cash flows and reported revenue.
- Developments in Title IV participation, gainful-employment outcomes, Massachusetts regulation, and the Massachusetts Attorney General investigation.
- The sustainability of positive operating income and higher EBITDA while the company continues to report net losses and preferred-stock dividends.