Universal Technical Institute, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2018. The company provides postsecondary technical education at 12 U.S. campuses, alongside manufacturer-specific training programs. Financial statements are unaudited.
Financial performance and condition
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $74.9 million, down 1.8% from $76.3 million | $236.7 million, down 2.6% from $242.9 million |
| Operating loss | $11.8 million, versus $2.8 million | $24.2 million, versus $0.7 million |
| Operating margin | -15.7%, versus -3.7% | -10.2%, versus -0.3% |
| Net loss | $11.7 million, versus $3.9 million | $21.7 million, versus $7.4 million |
| Loss per share | $0.52, versus $0.21 | $1.02, versus $0.46 |
| EBITDA (non-GAAP) | Loss of $7.2 million, versus earnings of $2.1 million | Loss of $10.4 million, versus earnings of $14.1 million |
For the nine-month period, operating cash used was $22.4 million, compared with $29.8 million used in the prior year. Investing activities provided $31.7 million, principally reflecting liquidation of trading securities and investment maturities, while capital expenditures used $17.1 million. Financing activities used $3.4 million, primarily for preferred dividends. Cash and cash equivalents were $56.0 million at June 30, 2018; cash plus current investments were $56.2 million. Restricted cash was an additional $13.4 million.
Total assets were $274.0 million and total liabilities were $135.4 million. Financing obligations totaled $42.3 million ($1.3 million current and $41.1 million long-term). Current assets were $108.5 million and current liabilities $73.3 million. The company reported a $37.6 million notes receivable balance related to its proprietary student loan program.
Material changes and notable items
- Average undergraduate full-time enrollment fell 5.2% to 10,380 for the nine months; student starts declined 6.8% to 4,683. Management attributed revenue pressure principally to lower enrollment and increased institutional tuition discounts. Industry training revenue and tuition increases partly offset the decline.
- Selling, general and administrative expense rose $7.0 million in the quarter and $18.8 million year to date. Drivers included higher advertising, consulting, compensation and contract-service costs, plus $1.2 million of goodwill and intangible-asset impairment charges.
- The impairment charges wrote off $0.8 million of goodwill and $0.4 million of definite-lived intangible assets associated with BrokenMyth Studios after weaker performance and lower projections.
- Adoption of ASC 606 on October 1, 2017 changed recognition of revenue associated with the proprietary loan program. The opening cumulative adjustment increased equity by approximately $37.2 million. For the nine months, reported revenue was $1.2 million higher than it would have been under the previous accounting method. The new method estimates collections and recognizes related revenue as students progress through programs.
- Preferred stock dividends were $3.9 million for the nine months; the Series A preferred stock carries a 7.5% annual cash dividend rate, with an additional accrual mechanism if cash dividends are not paid. Common-stock dividends had been eliminated.
Outlook, risks and contingencies
- For FY2018, management expected student starts to be near the prior year, with average student population down by a mid-single-digit percentage. Revenue guidance was $315–$320 million; operating expenses were expected at $352–$354 million, implying an operating loss of $32–$36 million and negative EBITDA.
- FY2018 capital expenditures were forecast at $23–$24 million, including approximately $11 million for a new Bloomfield, New Jersey campus expected to open in August 2018. Management anticipated annualized real-estate savings of $2.5–$3.0 million beginning in 2019.
- A multi-year transformation plan, intended for implementation over 12–18 months, focuses on marketing, admissions, student processing, retention and cost savings. Management expected significant financial benefits beginning in FY2019. A consulting agreement calls for $9.3 million over 16 months, with up to approximately $4.7 million in additional performance-based fees.
- Management believed cash, investments and operating cash flows would meet liquidity needs for the next 12 months. Risks include continuing enrollment weakness, competition, student affordability and debt sensitivity, and dependence on Title IV and veterans’ aid programs.
- All institutional Program Participation Agreements had expired March 31, 2018. The Houston institution received a four-year renewal; recertification remained pending for the Avondale and Phoenix institutions, while the schools were allowed to continue participating pending review. The company also continued monthly cash-flow reporting to the Department of Education.
- Proposed federal rules on borrower defenses and financial responsibility were under review; the company was assessing potential effects, including changes to its financial-responsibility composite score. Gainful Employment rulemaking was also ongoing.
- The company disclosed a Massachusetts Attorney General investigation concerning allegations involving student loans, guarantees and grants at its Norwood campus. It had not received further requests since 2015, had recorded no liability, and could not estimate the investigation’s outcome or costs. The filing warns that pending legal matters could materially affect results or financial condition.
Key facts for investors to verify
- Whether student starts and enrollment recover as projected, and whether the transformation plan delivers the anticipated FY2019 benefits.
- Collection performance and management’s estimates for the proprietary loan portfolio, including credit risk borne by the company.
- Final FY2018 results versus revenue, operating-loss and capital-expenditure guidance, including the costs and timing of the Bloomfield opening.
- Department of Education recertification decisions and the eventual effect of borrower-defense, financial-responsibility and gainful-employment rules.
- The progress and potential exposure from the Massachusetts investigation and other legal or regulatory matters.