Universal Technical Institute, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; unaudited. Unless otherwise noted, financial amounts below are in millions of dollars. The company provides postsecondary technician education through 11 U.S. campuses and manufacturer-specific training programs.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $97.0 | $98.4 | Down 1.4% |
| Operating income | $3.0 | $6.0 | Down 50.0% |
| Operating margin | 3.1% | 6.1% | Down 3.0 percentage points |
| Net income | $1.7 | $3.6 | Down 53.4% |
| Diluted EPS | $0.07 | $0.14 | Down $0.07 |
| Operating cash flow | $9.4 | $(1.6) | Improved $11.0 |
| Capital expenditures | $2.9 | $2.8 | Up slightly |
Educational services and facilities costs rose to $51.1 million from $49.7 million, while selling, general and administrative costs were nearly flat at $42.9 million. The company reported a 48.6% effective tax rate, including a $0.1 million noncash deferred-tax-asset write-off related to expired stock awards. EBITDA, a non-GAAP measure, was $8.9 million versus $12.1 million.
Balance sheet, liquidity and funding
- At December 31, 2013, cash and cash equivalents were $36.9 million; restricted cash was $5.9 million; and current investments were $55.7 million. Management cited aggregate cash, cash equivalents and current investments of $92.6 million.
- Total assets were $284.9 million and total liabilities were $146.5 million. The filing reports no conventional debt balance; a $33.5 million lease financing obligation was recorded for the completed Lisle, Illinois campus, including $0.5 million current and $32.9 million long-term.
- Operating cash flow improved from the prior-year quarter, when working-capital outflows included a large decline in deferred revenue and accounts payable. Q1 FY2014 operating cash flow included $2.1 million of net cash outflows from changes in operating assets and liabilities.
- The company paid a $0.10-per-share dividend, totaling approximately $2.5 million. It did not repurchase shares under its public repurchase program during the quarter.
Material changes and operating trends
- Average undergraduate full-time enrollment declined 6.7% to approximately 15,400; new student starts fell 18.5% to approximately 2,200. Management attributed weaker starts partly to one fewer start date and a lower share of applicants starting.
- Management estimated the enrollment decline reduced revenue by approximately $6.6 million; tuition increases of 2% to 4%, depending on program, partly offset the effect. Tuition related to the proprietary loan program is recognized as payments are collected. The filing cites $6.3 million of related tuition excluded from reported revenue; the note separately reports $7.0 million of tuition and interest income excluded during the quarter and a $4.5 million net amount excluded after collections and write-offs.
- Lower enrollment combined with the company’s largely fixed cost base compressed margins. Educational services costs increased, notably contract services supporting the Lisle campus relocation and outsourced financial-aid processes. Advertising and other SG&A costs also rose, partly offset by lower bonus and bad-debt expenses.
- The Lisle campus entered service in December 2013. The company recorded the building and related financing obligation and expects approximately $1.6 million of related depreciation in FY2014.
Outlook, risks and contingencies
- Management expected high-single-digit start growth for the quarter ending March 31, 2014 and low-single-digit growth for the nine months ending September 30, 2014. It cautioned that meeting or exceeding the prior year’s revenue and operating results for FY2014 could be challenging. No numerical full-year revenue or earnings guidance was provided.
- The company planned $11.0 million to $11.3 million of additional FY2014 capital expenditures, mainly for curriculum integration, an Orlando campus expansion and equipment. Automotive and Diesel Technology II integration was expected to involve $4.6 million to $5.0 million of capitalized costs and $2.7 million to $2.9 million of operating expenses in FY2014.
- Management said cash, investments and expected operating cash flows should meet working-capital, capital-expenditure and other needs for at least 12 months. It emphasized expense management while continuing investment in student recruitment and affordability initiatives, including scholarships.
- Key business risks include dependence on federal Title IV aid, affordability and student financing, competition, enrollment trends and seasonality. The proprietary loan program leaves the company responsible for credit and collection risk: loans outstanding were $68.2 million at quarter-end and are not recorded as assets in the balance sheet. The company had committed to provide approximately $91.0 million of such loans since program inception.
- The Department of Education’s gainful-employment rulemaking had not reached committee consensus. A proposed rule was expected in early 2014, with a final rule anticipated by November 1, 2014 and an expected effective date of July 1, 2015. The filing also notes a January 2014 increase in the maximum Pell Grant for award year 2014–15 to $5,730.
- A Massachusetts Attorney General investigation concerning alleged student-aid claims remained unresolved; the company said it could not predict its scope or outcome and had accrued no liability. DOJ investigation of previously disclosed False Claims Act claims had closed after DOJ declined intervention, and related claims with a former employee and a Department of Labor matter were settled or closed; follow-up documentation requested by the accreditor remained a contingency. The company had not accrued a liability for that request.
- The filing warns that stock-award expirations could cause further noncash tax charges; depending on the share price, management estimated a possible FY2014 deferred-tax write-off and tax expense of $0.4 million to $0.7 million.
Important facts for investors to verify
- Whether starts and enrollment recover in line with management’s stated FY2014 expectations, and how persistence and student affordability affect enrollment.
- The collection performance and credit losses of the proprietary loan portfolio, including the distinction between unrecognized loan-related tuition and reported revenue.
- The final gainful-employment regulations and any resulting effects on program eligibility, enrollment or Title IV funding.
- The outcome and potential costs of the Massachusetts Attorney General matter and remaining accreditor follow-up.
- Actual FY2014 curriculum-integration, campus-expansion and capital spending, together with the effect of the Lisle financing obligation and any further tax charges.