Universal Technical Institute, Inc. — Fiscal 2015 First Quarter
Reporting period: Three months ended December 31, 2014; comparisons are to the three months ended December 31, 2013 unless otherwise noted. UTI operates 11 postsecondary technical-education campuses and offers manufacturer-specific training. Amounts below are in millions, except per-share data and student counts.
Financial performance and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $95.7 | $97.0 |
| Operating income | $5.6 | $3.1 |
| Operating margin | 5.8% | 3.2% |
| Net income | $3.1 | $1.7 |
| Net margin | 3.2% | 1.8% |
| Diluted EPS | $0.12 | $0.07 |
| Operating cash flow | $2.0 | $9.6 |
- Cash and cash equivalents were $33.0 million at December 31, 2014, versus $39.0 million at September 30, 2014. Current investments were $48.9 million; management reported cash and current investments of approximately $82.0 million.
- Current assets were $130.6 million and current liabilities $97.7 million. Total liabilities were $151.5 million. Financing obligations totaled approximately $32.9 million, including current and long-term portions.
- Cash used in investing activities was $5.2 million, including $3.7 million of property and equipment purchases; cash used in financing activities was $2.7 million, primarily the $2.5 million dividend payment. Cash declined $5.9 million during the quarter.
- Management cited working-capital outflows as the principal reason operating cash flow fell: receivables used $7.4 million and income tax payable used $4.2 million, partly offset by a $2.8 million increase in deferred revenue.
Changes and operating drivers
- Revenue declined 1.4%, primarily because average undergraduate full-time enrollment fell 5.8% to approximately 14,500 and student starts declined 13.6% to approximately 1,900. Tuition increases of 2%–4%, depending on program, partly offset lower enrollment.
- Operating income rose 83.1% and net income rose 81.3%, as operating expenses fell 4.2% to $90.1 million. Educational services and facilities expense fell 6.4%; SG&A fell 1.5%.
- Cost reductions reflected restructuring and attrition, lower contract-services and occupancy costs, and a property-tax settlement. These savings were partly offset by advertising expense, which rose $1.4 million to $10.1 million.
- Interest expense, net, increased to $0.5 million from $0.1 million, primarily due to the financing obligation for the Lisle, Illinois campus. The effective tax rate was 42.0%, versus 48.0%.
- Postemployment benefit charges were $1.3 million in the quarter. The filing also revised the prior-year comparison for previously omitted student-retake revenue and related expense items; management said the corrections were immaterial to prior periods.
Outlook, risks and contingencies
- Full-year FY2015 guidance was largely unchanged: student starts and average student population expected to decline in the mid-single digits; revenue expected to decline approximately 3%–4%. Management expected year-over-year operating-income growth excluding new-campus pre-opening costs, and anticipated growth in applications and starts in the second half.
- Capital expenditures were expected to be approximately $35 million for FY2015, including about $13 million for the Long Beach campus and about $11 million for the Houston campus building, land and improvements. The company anticipated capitalizing $16.5 million–$17.5 million in Long Beach campus equipment and improvements.
- UTI began teaching integrated Automotive Technology and Diesel Technology II curricula in Orlando in January 2015 and expected $1.0 million–$1.2 million of related FY2015 operating expense. Approval for some veteran-funded program combinations in California and Florida remained uncertain.
- Key business risks include dependence on Title IV and veterans-benefit funding, difficulty financing students’ education, competition and tuition pressure, enrollment trends, and seasonal fluctuations. The proprietary student loan program leaves UTI with the loans’ credit and collection risk: the off-balance-sheet balance was $74.5 million at quarter-end, and the company had committed approximately $108.2 million to loans since inception.
- A Massachusetts Attorney General investigation concerning allegations related to student loans, guarantees and grants remained pending. The company had recorded no liability and said the scope, outcome and costs could not be predicted. Management stated pending legal matters could adversely affect results or financial condition.
- Management said cash flows, cash and investments should fund working capital, planned capital expenditures and other liquidity needs for the next 12 months. The filing cautions that quarterly results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether enrollment, applications and student starts improve as projected in the second half, and how that affects full-year revenue guidance.
- Progress, timing and total costs for the Long Beach and Houston projects, including the projected capital spending and Long Beach opening plans.
- Student-loan program performance, collections and credit losses, including the $74.5 million unrecognized outstanding balance and future commitments.
- Regulatory approvals for veterans’ benefits and developments in the Massachusetts investigation or other legal proceedings.
- Whether operating-margin improvement is sustainable after restructuring savings, higher advertising spending, severance costs and campus pre-opening expenses.