Universal Technical Institute, Inc. — Q3 FY2016 Form 10-Q
Business context and period: The company provides technical education and manufacturer-specific training through 12 U.S. campuses. This unaudited filing covers the quarter and nine months ended June 30, 2016; the fiscal year ends September 30. Financial figures below are in millions unless otherwise noted.
Financial performance
| Metric | Three months ended June 30, 2016 | Prior-year quarter | Nine months ended June 30, 2016 | Prior-year period |
|---|---|---|---|---|
| Revenue | $82.3 | $85.1 | $260.2 | $272.0 |
| Operating income (loss) | $(5.5) | $(4.0) | $(13.4) | $4.0 |
| Operating margin | (6.6)% | (4.7)% | (5.2)% | 1.5% |
| Net income (loss) | $(5.1) | $(3.0) | $(38.8) | $0.7 |
| Net margin | (6.1)% | (3.5)% | (14.9)% | 0.2% |
| EBITDA, non-GAAP | $(0.6) | $1.3 | $1.7 | $20.1 |
| Basic and diluted EPS | $(0.21) | $(0.12) | $(1.60) | $0.03 |
- Revenue and enrollment: Revenue declined 3.3% for the quarter and 4.3% year to date. Average undergraduate full-time enrollment fell 8.3% in the quarter and 9.0% year to date. New starts fell 15.8% in the quarter and 10.9% year to date. Tuition increases of up to 3%, depending on program, partly offset lower enrollment.
- Costs and profitability: Year-to-date operating expenses rose to $273.6 million from $268.0 million despite lower revenue. The nine-month net loss includes a $29.4 million increase in the deferred-tax valuation allowance, reflecting management’s assessment that future taxable income may not support realizing the deferred tax assets.
- Cash flow: Operating activities used $10.8 million in the nine months, versus $0.2 million used in the prior-year period. Investing activities provided $17.4 million, principally from investment maturities; financing activities provided $67.2 million, mainly from the preferred-stock issuance. Cash and cash equivalents were $103.2 million at June 30, compared with $29.4 million at September 30, 2015.
- Liquidity and obligations: Cash, cash equivalents and current investments totaled $108.1 million. Current assets were $145.7 million and current liabilities $72.3 million. Financing obligations totaled $44.2 million, of which $0.9 million was current. The filing reports no conventional borrowing balance in the presented balance sheet.
Material changes and notable items
- On June 24, 2016, the company issued 700,000 Series A convertible preferred shares for $70.0 million gross proceeds and approximately $69.2 million net cash proceeds. The preferred stock has a 7.5% annual cash dividend rate, senior liquidation rights, conversion features and specified investor approval rights. Common dividends were discontinued in June; three quarterly payments totaling approximately $1.5 million had been made during the nine-month period.
- The new Long Beach campus contributed $3.4 million of quarterly revenue and $7.9 million year to date, while incurring $4.8 million and $14.5 million of operating expenses, respectively, including allocated corporate overhead.
- The company restructured campus admissions during the quarter, incurring approximately $0.8 million in severance for about 30 employees; management expects annual savings of approximately $3.7 million.
- In February 2016, the company invested $1.0 million for a 25% interest in Pro-MECH and acquired substantially all assets of BrokenMyth Studios for $1.5 million, with possible contingent consideration up to $0.9 million.
Outlook, risks and contingencies
- For FY2016, management expected new starts and average student population to decline by a low double-digit percentage versus FY2015, revenue to decline approximately 6%–7%, and EBITDA to remain at minimal levels. Planned capital expenditures were reduced to $8–$9 million.
- Management said existing cash, investments and operating cash flows were expected to meet working-capital and other liquidity needs through the next 12 months. It also noted pressure on the Department of Education financial-responsibility composite score and expected the preferred proceeds to support exceeding the applicable standard at the September 30, 2016 measurement.
- Regulatory exposure includes proposed Department of Education rules on borrower defenses, institutional financial protection, student warnings and dispute-resolution practices. The company said final rules could materially affect its business. Following the preferred issuance, the Department requested monthly student rosters and biweekly cash-flow projections.
- A Massachusetts Attorney General investigation concerning alleged false claims related to student aid at the Norwood campus remained unresolved. The company had not accrued a liability and said the scope, outcome and costs could not be predicted.
- Under the proprietary student loan program, the company bears credit and collection risk. At June 30, approximately $74.5 million of program balances were not recognized on the balance sheet; $11.1 million was written off during the nine-month period. Tuition and interest are recognized when collected when collectability is not reasonably assured.
- The preferred-stock issuance triggered an ownership change for tax purposes under Section 382, which may limit use of certain tax deductions and losses, reduce or eliminate expected tax refunds, or result in tax payments despite a pre-tax loss.
Key facts for investors to verify
- Enrollment, new-start and revenue trends against management’s FY2016 outlook, including whether campus cost reductions offset lower student volumes.
- Cash burn, capital spending and the timing and availability of Title IV and other student funding; reconcile liquidity against financing obligations and preferred dividends.
- The assumptions and evidence supporting the deferred-tax valuation allowance, and the potential impact of Section 382 limitations on tax-loss utilization.
- Final Department of Education rules, composite-score results and any resulting monitoring, letter-of-credit or Title IV funding requirements.
- Developments in the Massachusetts investigation and the proprietary loan portfolio’s collections, write-offs and unrecognized balances.