Universal Technical Institute, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2012. Unaudited results are for the company’s fiscal second quarter and first half of fiscal 2012. UTI operates 11 U.S. campuses providing postsecondary technical education, alongside manufacturer-specific training.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Mar. 31, 2012 | Prior-year quarter | Six months ended Mar. 31, 2012 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $106.2 | $114.2 | $212.7 | $231.6 |
| Operating income | $2.9 | $11.4 | $9.5 | $28.2 |
| Net income | $1.9 | $7.0 | $5.9 | $17.3 |
| Diluted EPS | $0.08 | $0.28 | $0.24 | $0.70 |
| Operating margin | 2.7% | 10.0% | 4.5% | 12.2% |
| Net margin | 1.8% | 6.1% | 2.8% | 7.4% |
| EBITDA (non-GAAP) | $9.4 | $17.9 | $22.6 | $41.1 |
- Average undergraduate full-time enrollment fell 11.2% in the quarter and 10.9% for the six-month period. Lower enrollment drove revenue declines of 6.9% and 8.2%, respectively. Tuition increases of 4%–7% by program partly offset the enrollment impact; one additional earning day added about $1.6 million to quarterly revenue.
- Educational services and facilities expense declined, but higher selling, general and administrative expense—particularly advertising—more than offset those savings and compressed margins.
- Cash from operating activities was $15.6 million for the six months, down from $28.9 million. Capital expenditures were $3.5 million; net investing cash use was $7.3 million and financing cash use was $3.6 million.
- At March 31, cash and cash equivalents were $58.3 million and investments totaled $58.7 million, or $102.7 million combined. Current assets were $132.9 million versus current liabilities of $100.8 million. Total liabilities were $119.8 million. The filing does not report borrowings or debt as a balance-sheet line item.
- Cash dividend of $0.10 per share was paid in March, totaling about $2.5 million. UTI also repurchased 125,800 shares for about $1.6 million at an average $12.99 per share; its board had authorized repurchases up to $25 million.
Material changes and unusual items
- A non-Title IV funding agency clarified its program rules; UTI believes it will probably have to return excess student funding. It recorded a $4.3 million estimated current liability and a first-half pretax charge of $1.3 million ($0.8 million after tax), comprising a $0.3 million revenue reduction and $1.0 million in bad debt expense.
- Advertising expense rose $2.9 million in the quarter and $5.4 million for the first half as UTI shifted spending toward higher-quality inquiries. Advertising represented 11.0% of quarterly revenue and 10.4% of first-half revenue.
- UTI reclassified $5.5 million and 313,015 shares withheld for employee taxes as treasury stock. It said the out-of-period adjustment was not material to the affected prior periods and did not restate them.
Outlook, management commentary and risks
- Management expected average student populations to decline for fiscal 2012, with revenue down a mid-to-high single-digit percentage and operating margins lower than in 2011. It expected third-quarter net income to be below the second quarter and seasonally lowest for the year, followed by improvement in the fourth quarter.
- Management said application declines had moderated and was cautiously optimistic that new student starts could turn positive in the second half. Starts were about 3,400 in the quarter versus 3,600 a year earlier. The company expected advertising to increase in the third and fourth quarters and forecast full-year advertising expense at 10%–11% of revenue.
- UTI reported $33.6 million in outstanding proprietary student loans, which are not recognized as balance-sheet assets because collectability is not considered reasonably assured. It had committed about $45.2 million under a program with a $50 million aggregate credit allocation. UTI bears the credit and collection risk; revenue is generally recognized as cash is collected. First-half tuition and interest revenue excluded under the program was $6.3 million.
- Management said cash, investments and operating cash flows should meet working-capital and other liquidity needs for at least the next 12 months. It also identified student funding alternatives, curriculum integration and potential acquisitions or share repurchases as uses of cash.
- Risks include continued enrollment and student-financing challenges; changes to Title IV aid, Pell Grant eligibility and the 90/10 rule; new Department of Education and accreditor requirements; and possible CFPB oversight of the proprietary loan program. Management said pending legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether enrollment, applications and student starts stabilize, and whether management’s fiscal 2012 revenue and margin expectations are achieved.
- The final amount and timing of any repayment to the non-Title IV funding agency, and whether further liabilities or charges arise.
- Collections, write-offs and commitments in the proprietary loan program, including the effect on cash flows and reported revenue.
- The impact of federal aid, accreditation and regulatory changes on student eligibility, enrollment, compliance costs and the 90/10 test.
- Whether elevated advertising spending improves inquiry quality and enrollment enough to support profitability and planned shareholder distributions.