UNIVERSAL TECHNICAL INSTITUTE INC quarterly report, Q2 FY2022

Universal Technical Institute, Inc. — Q2 FY2022 Form 10-Q

Reporting period: Quarter and six months ended March 31, 2022. UTI provides transportation and technical education through 14 U.S. campuses, including MIAT, acquired November 1, 2021. Amounts below are in millions unless noted.

Financial performance

Revenue rose 31.4% for the quarter and 34.7% for the six-month period. Management attributed growth to increased enrollment and revenue per student, as well as MIAT; MIAT contributed $6.5 million of quarterly and $11.6 million of six-month revenue. Average full-time active students increased 13.6% in the quarter and 14.9% over six months, while new student starts declined 5.4% and 2.0%, respectively.

Quarterly educational services and facilities expense was $49.2 million and SG&A was $49.5 million. Six-month amounts were $97.1 million and $93.1 million. Expenses increased in dollars, but declined as a share of revenue, supporting improved operating margins. The reported income tax benefit—$4.6 million for the quarter and $5.9 million for six months—primarily reflected release of a majority of the deferred-tax valuation allowance; it was non-cash.

Cash, liquidity and debt

• Cash and cash equivalents were $61.5 million at March 31, 2022, down from $133.7 million at September 30, 2021. Including restricted cash, the period-end total was $73.0 million.
• Six-month operating cash flow was $10.4 million, versus $17.5 million a year earlier. Investing used $79.5 million, principally $53.2 million of property and equipment purchases and $26.5 million for MIAT, net of cash acquired. Financing used $3.9 million, including $2.6 million of preferred dividends.
• Gross debt was $48.7 million at quarter-end: $30.5 million on the Avondale loan and $18.1 million on the Lisle loan, plus finance leases. The company reported compliance with debt covenants. The Lisle loan was repaid in April after a new $38.0 million loan was arranged; the new loan bears one-month SOFR plus 2.0%, with half its principal effectively fixed at 4.69% through a swap.
• Current liabilities were $118.4 million, including $42.0 million deferred revenue. Management stated that operating cash flow and cash on hand were expected to meet working-capital, capital expenditure and other liquidity needs for at least the next 12 months.

Material developments, outlook and risks

• UTI completed the $28.8 million MIAT acquisition and purchased its Lisle, Illinois campus, also assuming debt in that transaction. Management cited growth and diversification as strategic priorities.
• New EV technician coursework was launched, and a strategic alliance with NAPA was formed. Austin and Miramar campuses were expected to open in the second half of 2022.
• On May 3, 2022, after quarter-end, UTI agreed to acquire Concorde Career Colleges for a $50 million base cash price, subject to customary conditions, including a Department of Education pre-acquisition review. UTI expected closing in the first half of fiscal 2023; completion was not assured.
• Regulatory exposure includes dependence on Title IV and veterans’ aid, continuing Department of Education rulemaking, and changes to the 90/10 rule expected to take effect July 1, 2023. UTI Texas was subject to a 30-day delay for first-time borrower loan disbursements due to a cohort default rate of at least 15% for one of the three most recent years.
• The CFPB requested information in January 2022 while assessing whether UTI is subject to its supervisory authority in connection with student lending. UTI said it had responded and was awaiting further guidance. The filing did not quantify a potential loss from legal or regulatory proceedings.
• Other risks include enrollment and student affordability, execution and integration of acquisitions, campus utilization, student outcomes, and interest-rate exposure. The filing reported no goodwill or indefinite-lived intangible impairment indicators at March 31, 2022.

Most important facts for investors to verify

• Whether enrollment growth and new student starts improve, and how much revenue growth reflects MIAT versus the existing business.
• The sustainability of operating margins and earnings excluding the deferred-tax valuation-allowance release and the $1.6 million Lisle lease-settlement gain.
• Cash generation and planned capital spending, given the substantial decline in cash and six-month investing outflows.
• Terms and ongoing servicing of the replacement Lisle financing, leverage, and compliance with debt covenants.
• Regulatory developments affecting Title IV eligibility, 90/10 compliance and the CFPB’s student-lending review.
• Conditions, financing and Department of Education review for the proposed Concorde acquisition, and the expected costs and integration risks.