Universal Technical Institute, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014; unaudited. UTI operates 11 U.S. campuses offering technical career education and manufacturer-specific training. Most students rely on federal Title IV aid and veterans’ benefits.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $91.3m, up 0.4% from $91.0m | $283.0m, down 0.5% from $284.5m |
| Operating income | $1.1m vs. $0.5m | $2.6m vs. $4.5m |
| Operating margin | 1.2% vs. 0.5% | 0.9% vs. 1.6% |
| Net income | $0.4m vs. $0.3m | $0.5m vs. $2.9m |
| Net margin | 0.4% vs. 0.3% | 0.2% vs. 1.0% |
| EBITDA (non-GAAP) | $6.8m vs. $6.4m | $19.9m vs. $22.7m |
Nine-month operating expenses were $280.5m, up from $279.9m. SG&A declined slightly to $130.0m, but advertising expense rose $2.1m to $30.2m. Nine-month net interest expense was $1.1m, compared with $0.2m of net interest income a year earlier. The nine-month effective tax rate was 77.8%, including a noncash $0.6m charge related to deferred tax assets for stock-based compensation; management said tax rates may remain variable.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $25.1m; restricted cash was $2.7m. Cash plus current investments totaled $73.3m, as reported by management. Current assets were $107.3m and current liabilities $87.7m.
- Nine-month operating cash flow was $9.5m, versus $5.4m. Investing cash outflow was $10.6m and financing cash outflow $9.4m; cash decreased $10.5m to $25.1m.
- Total liabilities were $141.1m. Lease financing obligations were $38.0m, including $5.3m current and $32.6m long-term; the filing reports no conventional borrowings. The Lisle campus financing obligation arose from a build-to-suit lease.
- UTI paid $7.4m in dividends and repurchased $1.4m of shares during the nine-month period. Management believes cash, investments and operating cash flows can fund expected needs through the next 12 months.
Material changes and operating trends
- Student starts fell 24.0% in the quarter to approximately 1,900 and 9.9% year to date to approximately 7,300. Average undergraduate full-time enrollment declined 2.9% in the quarter and 4.0% year to date; enrollment was 12,600 at June 30.
- Quarter revenue benefited from tuition increases of 2%–4% and a $0.6m increase in industry training revenue, offset by lower enrollment. Year-to-date enrollment decline reduced revenue by an estimated $10.6m; tuition increases and $1.7m higher industry training revenue partly offset the impact.
- Revenue excludes tuition and interest income on proprietary student loans until cash is collected. The amount excluded was $18.4m year to date; the related off-balance-sheet loan balance was $71.4m, with $6.4m written off during the period.
- Management attributed weaker year-to-date margins to lower student populations, a fixed-cost base and investment in advertising. Graduate employment for 2013 graduates was above the prior-year level at the same point, according to the filing.
Outlook, risks and unusual items
- Management expected fourth-quarter starts to decline in the mid-single digits year over year, but forecast meaningful improvement in fourth-quarter operating income versus the prior year through expense management. It expected advertising to remain 10%–11% of fiscal 2014 revenue.
- UTI planned to open a new campus similar in scale to its Dallas/Fort Worth campus in calendar 2015. It expected another $7.0m–$7.3m of fiscal 2014 capital expenditures. Curriculum integration was expected to require $0.7m–$1.0m of capitalized spending and $0.5m–$0.7m of operating expense in the remainder of fiscal 2014.
- Proposed federal gainful-employment rules could materially affect operations or Title IV eligibility; final rules were expected in October 2014, and the impact was not estimable. In 2013, approximately 68% of revenue on a cash basis came from Title IV programs.
- New Massachusetts regulations effective June 20, 2014 require disclosures and recruiting-practice changes; management said their operational impact was unknown. UTI also disclosed an ongoing Massachusetts Attorney General investigation concerning alleged false claims related to student aid at its Norwood campus; no liability was recorded, and the outcome and costs could not be predicted.
- The Orlando campus received continuing accreditation with reporting and must submit an outcomes report in February 2015 for a program that fell below the accreditor’s graduation benchmark. California approval for veterans’ benefits under a new curriculum was also pending.
- Other notable items include the Lisle campus lease accounted for as a financing obligation, an Orlando building expansion underway, and executive termination commitments estimated at $2.7m–$9.2m.
Important facts for investors to verify
- Whether starts and enrollment stabilize, and whether the planned admissions compensation changes improve recruiting effectiveness without further reducing starts.
- The final gainful-employment rules and the consequences of Massachusetts regulations for enrollment, recruiting and Title IV participation.
- Collection performance and write-offs in the proprietary loan program, including the $71.4m balance not recorded on the balance sheet.
- Progress toward the Orlando accreditation benchmark and California veterans’ funding approval for the new curriculum.
- Actual fourth-quarter results, capital spending, lease obligations and cash generation relative to management’s outlook.