Business context and reporting period
Universal Technical Institute, Inc. (NYSE: UTI) filed this unaudited Form 10-Q for the quarter ended March 31, 2019, covering its fiscal second quarter and first six months of fiscal 2019. The company operates 13 U.S. campuses offering career-focused technical education and manufacturer-sponsored training. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $81.7 | $164.8 | $80.7; $161.8 |
| Operating loss | $(5.6) | $(12.8) | $(8.8); $(12.4) |
| Net loss | $(5.3) | $(13.0) | $(8.8); $(10.0) |
| Net loss per share | $(0.26) | $(0.61) | $(0.40); $(0.50) |
| Operating margin | (6.8)% | (7.8)% | (10.9)%; (7.7)% |
| Operating cash flow | Not provided separately | $2.8 | $(6.1) |
| Capital expenditures | Not provided separately | $4.8 | $7.6 |
Quarterly revenue rose 1.3% year over year, while the operating loss narrowed by $3.2 million. For the six-month period, revenue increased 1.8%, but the operating loss widened by $0.4 million and net loss increased by $3.0 million. Six-month net loss included a $2.6 million income-tax expense, compared with a $2.9 million tax benefit in 2018.
At March 31, cash and cash equivalents were $52.9 million, with restricted cash of $14.0 million; combined cash and restricted cash totaled $66.9 million. Current assets were $101.1 million and current liabilities $88.2 million. Total liabilities were $148.1 million. Financing obligations totaled $41.4 million, including $1.4 million current and $40.0 million long-term. No separate conventional borrowing balance is identified in the provided filing text.
Shareholders’ equity was $112.2 million, down from $126.6 million at September 30, 2018, primarily reflecting accumulated losses and preferred dividends. The company paid $2.6 million in Series A preferred dividends during the six months.
Material changes and management commentary
- Average undergraduate full-time enrollment increased 0.7% to 10,898 for the six months; new student starts rose 12.7% to 3,533. Management attributed the starts increase to transformation initiatives and continued execution of its metro-campus strategy.
- Bloomfield, New Jersey, opened in August 2018 and contributed $2.6 million of quarterly revenue and $4.5 million for the six months. Its direct costs were $2.1 million and $4.1 million, respectively.
- Quarterly operating results improved with lower compensation and related costs, professional services, student training aids and occupancy costs. Six-month operating results were pressured by Norwood-campus severance, higher professional services and student expenses.
- Operating cash flow improved to $2.8 million from cash use of $6.1 million, helped principally by a $9.7 million reduction in receivables, attributed largely to the timing of Title IV disbursements and other student-related receipts. Cash, cash equivalents and restricted cash declined $5.2 million during the six months.
- Management expects cash flows, cash on hand and investments to meet working-capital, capital expenditure and other liquidity needs for at least the next 12 months. Fiscal 2019 capital expenditures are expected to be $6–$8 million, including approximately $1.6 million for the Dallas/Fort Worth welding program and another $1.0 million for course development.
Outlook, risks, contingencies and unusual items
- UTI stopped accepting applications at its Norwood, Massachusetts campus; the last group began March 18, 2019, and closure is expected in fall 2020. The company expects approximately $0.9 million in postemployment benefits at closure and anticipates improved annual pretax income, EBITDA and cash flow after the exit. It plans to teach out current students, but some may withdraw.
- Campus closure may expose the company to Title IV loan-discharge claims. The Department of Education could also recalculate the company’s composite score, require a letter of credit, or impose conditions on Title IV participation in connection with reportable events.
- Regulatory and accreditation matters remain significant. Orlando received two accreditation findings, including program employment-benchmark issues; Houston had a finding involving collision-program benchmarks. The company described corrective steps, but several campus accreditation reviews remained pending at filing. Federal student-aid rules, borrower-defense requirements and proposed state requirements—including proposals in California—could add costs or affect operations.
- The company disclosed ordinary-course litigation and regulatory claims but stated that it could not currently estimate the possible loss or range; outcomes could materially affect results, cash flows or financial condition.
- The company reported a full valuation allowance against deferred tax assets and noted that Section 382 limitations may affect use of tax deductions and losses, potentially requiring tax payments despite pretax losses.
- Management’s EBITDA discussion appears inconsistent: the narrative describes quarterly and six-month EBITDA as positive $0.3 million and $3.2 million, while the reconciliation table shows losses of $0.319 million and $3.234 million, respectively. Investors should verify the intended signs against the filed exhibit.
- The company expects adoption of the lease accounting standard in fiscal 2020 to have a material financial-statement impact. It had begun implementing systems and related controls.
Most important facts for investors to verify
- Confirm the EBITDA signs in the reconciliation and related MD&A narrative.
- Track new starts, enrollment and student outcomes, including the graduate-employment trend: management said the rate improved overall and in automotive, diesel, marine and motorcycle programs, but declined in collision repair.
- Monitor Norwood’s teach-out, closure costs, expected savings and any Title IV or loan-discharge consequences.
- Follow campus accreditation outcomes and changes to federal and state financial-aid regulation.
- Assess whether operating cash generation is sustainable, given the significant benefit from receivables timing, and compare actual capital spending with the $6–$8 million fiscal-year outlook.