UNIVERSAL TECHNICAL INSTITUTE INC quarterly report, Q3 FY2021

Business context and reporting period

Universal Technical Institute, Inc. provides postsecondary technical education through 12 U.S. campuses, along with manufacturer-specific training. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2021, ended June 30, 2021. Financial amounts below are in millions unless stated otherwise.

Financial performance and position

Metric	Three months ended June 30	Nine months ended June 30
Revenue	$83.8; +53.8% year over year	$237.6; +5.9%
Operating income (loss)	$3.1, versus $(13.8)	$2.2, versus $(10.0)
Net income (loss)	$3.0, versus $(13.3)	$2.5, versus $1.6
Operating margin	3.6%, versus (25.3)%	0.9%, versus (4.5)%
Net margin	3.6%, versus (24.3)%	1.1%, versus 0.7%
Net income (loss) available after preferred dividends	$1.7, versus $(14.6)	$(1.4), versus $(2.4)
Operating cash flow	Not provided for the quarter	$14.8, versus $(10.1)

• Quarterly growth reflected average undergraduate full-time active students up 19.1% and new starts up 38.8%. For the nine-month period, average full-time enrollment rose 10.4% and starts rose 24.6%.
• Prior-year revenue was affected by pandemic-related campus disruption, student leaves and $10.8 million of deferred revenue. All campuses were open; by June 30, all students had returned to in-person labs, with less than 1% having catch-up lab work outstanding. The remaining $0.8 million of pandemic-related deferred revenue was recognized in the quarter.
• Cash and cash equivalents were $102.9 million at June 30, up from $76.8 million at September 30, 2020; restricted cash was $11.9 million. Short-term held-to-maturity investments declined to $0.3 million from $38.1 million.
• Current assets were $161.9 million and current liabilities $120.3 million. Total liabilities were $297.8 million; shareholders’ equity was $177.2 million.
• Gross term-loan principal was approximately $31.1 million; debt net of issuance costs and finance leases was $31.0 million. The seven-year loan bears interest at LIBOR plus 2.0%; a swap fixes the rate on half the original principal at 3.5%. The loan is secured by the Avondale campus. The company reported compliance with covenants at June 30.
• Capital expenditures were $54.2 million for the nine months, including $45.2 million for the Avondale property. Investing cash outflow was $16.6 million, and financing cash inflow was $27.7 million.

Material changes and management commentary

• Quarterly operating profitability returned as revenue recovered; expenses rose less than revenue. Nine-month SG&A declined $2.8 million and educational services and facilities expense increased $3.8 million. Lower occupancy costs helped, while staffing, supplies and pandemic-related comparisons affected expenses.
• The nine-month net-income comparison includes a material prior-year tax benefit: the 2020 period included $10.7 million of income tax benefit, largely related to CARES Act NOL carrybacks. The 2021 period recorded $0.1 million of tax expense.
• Management stated that operating cash flows, cash and investments should meet working-capital, capital-expenditure and other liquidity needs for existing operations and announced growth initiatives over the next 12 months.
• Growth plans include new campuses in Austin and Miami during fiscal 2022, welding-program expansion and a proposed acquisition of MIAT College of Technology. The MIAT cash purchase price is not to exceed $26.0 million, subject to adjustments and closing conditions, including Department of Education and accreditor approvals.
• The company authorized a $35.0 million common-stock repurchase plan in December 2020, but had made no repurchases through June 30, 2021. It pays no common-stock dividend; Series A preferred dividends totaled $3.9 million for the nine months.

Outlook, risks and contingencies

• No specific full-year revenue, earnings or enrollment guidance is stated. Management cautions that nine-month results are not necessarily indicative of fiscal-year results and notes seasonal enrollment patterns, typically with lower summer enrollment.
• Key risks include Title IV eligibility and other education regulation, the evolving 90/10 rule under ARPA, regulatory rulemaking, state and accreditation approvals, enrollment and student employment conditions, and ongoing effects of COVID-19. Florida Motorcycle and Marine blended programs remained under temporary state approval pending permanent approval.
• The term loan has financial and restrictive covenants; breach or failure to pay could trigger default and accelerated repayment. Half the loan remains exposed to floating rates; management estimated a 1% LIBOR change would alter annual interest expense by about $0.3 million, assuming other terms unchanged.
• The company is party to ordinary-course legal matters but said it could not estimate possible losses; pending proceedings could materially affect results, cash flows or financial condition. It also maintains a full valuation allowance on deferred tax assets that depend on future taxable income.
• The company received $16.8 million of HEERF II funds and awarded approximately $11.5 million to students during the quarter, expecting to award the remaining $5.3 million by fiscal year-end. It was granted $9.9 million of HEERF III funds, which became available to draw down in July 2021.

Most important facts for investors to verify

1. Whether enrollment and student starts continue to translate into revenue and sustainable operating margins after pandemic-related comparisons normalize.
2. MIAT acquisition closing conditions, final consideration and funding, along with execution and costs of planned campus openings and expansions.
3. Compliance with term-loan covenants and the impact of LIBOR transition and unhedged interest-rate exposure.
4. Ongoing eligibility under Title IV and other aid programs, including the future effect of ARPA’s revised 90/10 requirements and outstanding Florida program approvals.
5. Student outcomes, proprietary-loan collections and cash conversion; nine-month EPS available to common shareholders remained negative despite reported GAAP net income.