Universal Technical Institute, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012; comparative period is the three months ended December 31, 2011. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and period
UTI provides postsecondary technical education and manufacturer-specific training through 11 U.S. campuses. Average undergraduate full-time enrollment fell 9.8% year over year to approximately 16,500, and new starts declined 18.2% to 2,700. Management cited fewer applications, macroeconomic conditions, competition and regulatory challenges.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $98.4 | $106.4 |
| Operating income | $6.0 | $7.3 |
| Operating margin | 6.1% | 6.9% |
| Net income | $3.6 | $4.5 |
| Diluted EPS | $0.14 | $0.18 |
| EBITDA (non-GAAP) | $12.1 | $14.0 |
| Operating cash flow | $(1.6) | $5.6 |
Revenue declined 7.5%, primarily reflecting lower enrollment, partly offset by tuition increases of 3%–5%, depending on program. Educational services and facilities expense decreased to $49.7 million; selling, general and administrative expense decreased to $42.7 million, including lower advertising and compensation costs. Net margin was 3.6%, versus 4.2% a year earlier. The filing does not present a gross margin.
At December 31, 2012, cash and cash equivalents were $30.2 million and current investments were $52.1 million, together $82.3 million. Current assets were $115.4 million and current liabilities $80.3 million. Total liabilities were $107.8 million; the balance sheet does not report borrowings or other financial debt. Operating cash outflow reflected working-capital movements, notably declines in deferred revenue and accounts payable and accrued expenses. Investing cash outflow was $6.3 million; financing cash outflow was $7.6 million, including $5.4 million of share repurchases and a $2.5 million dividend payment.
Material changes and unusual items
- Enrollment and capacity utilization weakened: utilization was 58.9%, compared with 62.2% in the prior-year quarter.
- The prior-year comparative results were revised for identified prior-period errors. The revision increased Q1 FY2012 net income by $0.439 million, from $4.040 million as reported to $4.479 million as revised; investors should use the revised comparative figures shown in this filing.
- The proprietary student loan program involves UTI assuming credit and collection risk. The company recognizes related tuition and interest when collected because collectability is not considered reasonably assured. At quarter-end, program balances not recorded on the balance sheet were $52.8 million, and UTI had committed to provide approximately $65.1 million in loans. The filing reports $5.8 million of related tuition excluded from revenue in MD&A; the program note reports $5.3 million net excluded for the quarter after collections and write-offs.
- UTI repurchased 556,100 shares for approximately $5.4 million during the quarter and paid its first reported quarterly dividend of $0.10 per share. Management said it intended to pay dividends quarterly, subject to board discretion.
- Construction in progress included $7.4 million for the Lisle, Illinois campus. A $4.9 million construction liability financed construction in progress during the quarter.
Outlook, risks and contingencies
Management expected 2013 new student starts to decline by mid-to-high single digits, with possible year-over-year improvement in the fourth quarter. It projected a high-single-digit revenue decline for fiscal 2013 and lower operating margin and net income than in fiscal 2012. Management cautioned that quarterly results are seasonal and may be volatile. For curriculum integration, it expected to capitalize an additional $2.8–$3.2 million and incur $3.9–$4.2 million of additional operating expense in fiscal 2013.
Management said cash flows, cash on hand and investments should meet working-capital, capital expenditure and other liquidity needs for at least 12 months. Risks include reliance on Title IV financial aid, student financing availability, enrollment trends, competition and regulatory changes. Six campuses became subject to 30-day delays in first federal student-loan disbursements in October 2012.
The Department of Justice was conducting a preliminary investigation concerning alleged Title IV incentive-compensation and other potential violations. The Massachusetts Attorney General had issued a civil investigative demand concerning alleged false claims related to student loans, guarantees and grants at the Norwood campus. A former employee also brought a Department of Labor whistleblower complaint. UTI said it could not predict outcomes or estimate potential costs for certain matters and had not accrued related liabilities. ACCSC deferred its decision on reaccreditation of the Norwood campus pending additional information; UTI submitted requested information in January 2013, with final action expected at ACCSC’s February 2013 meeting. No liability was recorded for the investigations or requests described.
Key facts for investors to verify
- Enrollment, new-start trends and progress against management’s fiscal 2013 outlook.
- Cash conversion and working-capital trends, especially deferred revenue and federal aid disbursement timing.
- Proprietary loan-program commitments, unrecorded balances, collections, write-offs and the differing $5.8 million and $5.3 million revenue-exclusion disclosures.
- Developments in the DOJ and Massachusetts investigations, the whistleblower complaint, and Norwood campus accreditation.
- Expected costs and timing for curriculum integration and the Lisle campus, alongside planned dividends and share repurchases.