Universal Technical Institute, Inc. — Form 10-Q
Reporting period: Third quarter and nine months ended June 30, 2011. The company provides postsecondary technical education through 11 U.S. campuses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Revenue | $108.9; +1.3% year over year | $340.5; +7.5% year over year |
| Operating income / margin | $6.7 / 6.2%, versus $9.9 / 9.2% | $34.9 / 10.3%, versus $34.8 / 11.0% |
| Net income / margin | $4.0 / 3.7%, versus $6.3 / 5.8% | $21.3 / 6.3%, versus $21.6 / 6.8% |
| Diluted EPS | $0.16, versus $0.25 | $0.86, versus $0.88 |
| EBITDA (non-GAAP) | $13.2, versus $14.9 | $54.4, versus $49.4 |
- For the nine months, operating cash flow was $31.6, down from $37.6. Investing activities used $44.0, including $26.1 in property and equipment; financing activities provided $0.6. Cash declined $11.8 to $37.1.
- At June 30, cash and current investments totaled $77.5; investments beyond one year were $9.0. Current assets were $111.4 and current liabilities $95.9, implying working capital of $15.5. Total assets were $249.6 and total liabilities $114.6.
- No conventional borrowings are reported on the balance sheet. The proprietary student loan program carries credit and collection risk for UTI; its $25.0 outstanding balance is not reflected on the balance sheet under the company’s accounting policy.
Changes versus comparable periods
- Quarterly revenue growth from tuition increases of 4%–7% was largely offset by a 3.8% decline in average full-time enrollment, to 17,200. Nine-month average enrollment increased 2.7%, to 18,800.
- Student starts fell 32.5% in the quarter to 2,700 and 20.0% over nine months to 9,600. Capacity utilization declined to 58.1% in the quarter from 66.8% a year earlier.
- Quarterly operating income fell 31.9% and net income fell 35.8%. For nine months, operating income was broadly flat while net income declined 1.5%; higher operating costs compressed margins.
- Operating cash flow was lower, with $17.6 of cash used by the decline in accounts payable and accrued expenses and $6.0 by lower deferred revenue. Depreciation and amortization rose to $18.4 from $13.6 over nine months.
Outlook, risks and unusual items
- Management expected fiscal 2011 revenue growth in the single digits, with new students below fiscal 2010 levels, and projected operating margins of 11%–13%, excluding $4.3 of severance charges. The company said the outlook did not include effects of new regulations that it could not estimate.
- A June 2011 workforce reduction affected approximately 195 employees and generated about $4.3 in quarterly severance charges. Management expected approximately $12.4 in compensation and benefit savings in fiscal 2012.
- Federal education rules create material uncertainty, including Title IV compliance and gainful-employment standards effective July 2012. UTI said preliminary analysis indicated its programs met the gainful-employment requirements, while warning that future eligibility, enrollment, costs and results could be affected by regulatory interpretation and program metrics.
- Elimination of year-round Pell Grants beginning in 2011–12 may weaken student show rates or increase demand for UTI’s proprietary loans. Potential future Pell reductions and declining state aid are additional risks.
- The proprietary loan program had used or committed approximately $29.3 of its $40.0 authorization. Nine-month loan write-offs were $4.1; the company recognized revenue and interest only as payments were collected. Nine-month tuition and interest excluded under the program totaled $6.7 before collections and write-offs.
- UTI was investing in curriculum transformation, with approximately $18.7 capitalized to date and $0.4–$0.7 of additional capitalization anticipated for the rest of 2011. It reported no pending legal proceeding expected to have a material adverse effect and stated disclosure controls were effective.
- Results are seasonal, and management cautioned that quarterly performance may remain volatile. No special cash dividend was declared in the 2011 periods; the comparable 2010 periods included a $1.50-per-share special dividend.
Important facts for investors to verify
- Whether starts, enrollment and capacity utilization stabilize, and whether tuition increases can offset weaker student volume.
- Progress against the 11%–13% fiscal 2011 operating-margin outlook, noting the stated exclusion of severance and unestimated regulatory effects.
- Actual fiscal 2012 savings from the workforce reduction and any further costs or impacts from compensation changes.
- Program-level performance under gainful-employment measures, future Department of Education guidance, and effects on Title IV eligibility and student demand.
- Proprietary loan collections, write-offs and remaining authorization, including the off-balance-sheet presentation and revenue recognized only upon collection.
- Cash generation and investment needs, including capital spending and the effect of working-capital movements on liquidity.