Universal Technical Institute, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results for the three months ended September 30, 2018; this is an annual report, not a standalone quarterly filing. Financial amounts below are in U.S. dollars.
Business context
UTI provides postsecondary technical education and manufacturer-sponsored training in automotive, diesel, collision repair, motorcycle, marine, welding and CNC machining fields. It operated 13 campuses at year-end. Average full-time enrollment was 10,418, down 4.3% from FY2017. The company began a multi-year transformation plan in 2018 and opened a Bloomfield, New Jersey campus in August.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $317.0 million | $324.3 million |
| Operating expenses | $352.2 million | $326.1 million |
| Operating loss (margin) | $35.3 million (11.1%) | $1.8 million (0.6%) |
| Net loss | $32.7 million | $8.1 million |
| Net loss per diluted share | $1.51 | $0.54 |
| Cash used in operating activities | $13.5 million | $10.0 million |
| Capital expenditures | $20.6 million | $8.2 million |
Revenue declined 2.3%; lower average enrollment reduced revenue by approximately $13.7 million, partly offset by tuition increases of up to 2.5% and higher industry-training revenue. Selling, general and administrative expense rose 17.0% to $169.7 million, driven in part by increased advertising, consulting, compensation and professional-services costs. Reported EBITDA was negative $16.7 million, versus positive $17.9 million in FY2017.
Fourth quarter: Revenue was $80.3 million, operating loss $11.1 million and net loss $11.0 million. In the fourth quarter of FY2017, revenue was $81.3 million, operating loss $1.1 million and net loss $0.8 million.
Liquidity and obligations: Year-end cash and cash equivalents were $58.1 million, with $14.1 million of restricted cash and no investments. Current assets were $116.8 million and current liabilities $92.5 million; reported working capital was $24.3 million. The company reported no short- or long-term borrowings, but had $42.0 million of financing obligations related to campus facilities. Future contractual commitments totaled $263.9 million, including $151.5 million of operating leases. Preferred-stock cash dividends were $5.25 million in FY2018.
Changes, outlook and notable items
- New student starts increased 1.2% to 10,705, while average enrollment continued to decline. Ending enrollment was 11,931, down 1.1% year over year.
- Management forecast FY2019 starts growth in the mid- to high-single digits, average student population growth in the low-single digits, and revenue of $322 million to $332 million. It expected operating expenses of $337 million to $347 million, an operating loss of $10 million to $15 million, positive EBITDA of $5 million to $11 million, and positive free cash flow. Planned capital expenditures were $8 million to $10 million. These are management estimates, not guarantees.
- Management said marketing and admissions investment, expense management, the transformation plan and the new campus would support a return to growth. It identified low unemployment, competition, affordability and student willingness to incur debt as enrollment challenges.
- ASC 606 was adopted using the modified retrospective method on October 1, 2017. Adoption increased opening shareholders’ equity by approximately $37.2 million, principally reflecting changed revenue recognition for the proprietary loan program. FY2018 reported revenue was $2.2 million higher under the new standard than it would have been without adoption; comparative FY2017 figures were not restated.
- FY2018 included $1.2 million of noncash goodwill and intangible-asset impairment charges relating to BrokenMyth Studios. A separate $4.0 million payment to the transformation consultant was made after year-end and was expected to be expensed in FY2019’s first quarter.
Risks, contingencies and other considerations
- UTI derived approximately 71% of revenue on the regulatory cash-basis calculation from Title IV programs and approximately 17% from veterans’ benefits. Changes to funding rules, eligibility or agency oversight could materially affect enrollment, cash flow and operations.
- Management calculated its FY2018 federal financial-responsibility composite score at 1.6; a score of 1.5 is generally the threshold for financial responsibility without further oversight. The Department of Education had not yet made its determination based on the audited statements.
- Regulatory developments involving borrower defense, financial-responsibility standards, gainful employment and accreditation remained uncertain. The filing describes potential financial-protection, funding and operating consequences if requirements are not met.
- Legal claims and proceedings arise in the ordinary course. The company stated it could not estimate the possible loss or range of losses for pending matters; an adverse outcome could be material.
- The Series A preferred stock carries a 7.5% annual cash-dividend rate; unpaid dividends accrue at a higher rate under the stated terms. Coliseum’s voting power could increase substantially if required regulatory and stockholder approvals remove existing caps.
Important facts for investors to verify
- Whether student starts, average enrollment and revenue growth met FY2019 guidance, and whether losses and cash use improved as planned.
- Whether transformation-plan spending, campus expansion and advertising produced measurable enrollment and completion benefits.
- The Department of Education’s final composite-score determination and any resulting cash-monitoring, letter-of-credit or other requirements.
- Collection performance and estimates for proprietary student loans, including the effect of the ASC 606 accounting change.
- Developments in Title IV and veterans’ funding rules, pending legal matters and the preferred-stock dividend and approval terms.