Universal Technical Institute, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also presents unaudited fourth-quarter results. UTI operates 12 campuses offering technical programs and manufacturer-sponsored training; average undergraduate full-time enrollment was approximately 10,900.
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $324.3 million | $347.1 million |
| Operating expenses | $326.1 million | $365.8 million |
| Operating loss / margin | $1.8 million / (0.6%) | $18.6 million / (5.4%) |
| Net loss | $8.1 million | $47.7 million |
| Adjusted EBITDA (non-GAAP) | $17.9 million | $0.8 million |
| Operating cash flow | $(10.0) million | $7.4 million |
| Average undergraduate enrollment | 10,900, down 9.2% | 12,000 |
Revenue fell 6.6%, principally because lower average enrollment reduced revenue by approximately $32.6 million; tuition increases and higher industry-training revenue partly offset the decline. The company reported a $5.4 million income-tax expense despite a pretax loss, including a $6.2 million increase in the deferred-tax-asset valuation allowance. The much larger prior-year net loss included a $34.2 million valuation-allowance charge.
FY2017 operating expenses declined $39.7 million, aided by workforce reductions and other cost controls. Operating margin improved, but the company remained loss-making. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as GAAP profit or cash flow.
Fourth quarter: Revenue was $81.3 million versus $86.9 million in Q4 FY2016; operating loss was $1.1 million versus $5.2 million; net loss was $0.8 million versus $8.9 million.
Liquidity, capital and obligations
- At September 30, 2017, cash and cash equivalents were $50.1 million and investments were $47.8 million, or $97.9 million combined. Restricted cash of $14.8 million is additional but not generally available for operations.
- Working capital was $60.4 million; current assets were $146.8 million and current liabilities were $86.4 million. Shareholders’ equity was $125.8 million.
- Operating cash flow was negative $10.0 million. Investing cash outflow was $52.2 million, primarily reflecting purchases of securities; cash capital expenditures were $8.2 million. Financing cash outflow was $6.8 million, including $5.3 million of preferred-stock dividends.
- The filing reports no short- or long-term borrowings. It does report $43.1 million of financing obligations related to campus facilities, plus $127.7 million of net future operating-lease commitments and $31.4 million of purchase obligations.
- The company’s 2017 ED financial-responsibility composite score was calculated at 2.2; ED’s final determination remained subject to its review. The common-stock dividend had been eliminated in 2016.
Changes, outlook and management commentary
- Enrollment continued to decline: average undergraduate enrollment fell 9.2%, and approximately 10,600 new students started in FY2017, down 6.2%. Management cited macroeconomic pressures, regulation, competition and internal execution challenges that reduced inquiry volume.
- Management’s FY2018 outlook was revenue of $310–$320 million, new student starts growing in the low single digits (weighted to the second half), and average student population declining in the mid-single digits. It expected an operating loss of $20–$25 million and negative EBITDA.
- FY2018 capital expenditures were forecast at $24–$25 million, including approximately $11 million for a planned Bloomfield, New Jersey campus, $4 million to expand welding, and spending on campus equipment and real-estate consolidation. Management expected annualized real-estate savings of $3–$4 million beginning in 2019.
- Welding and CNC machining programs launched in 2017; the company planned to expand welding and open the New Jersey campus in fall 2018. These initiatives require investment while enrollment and revenue remain under pressure.
- UTI derived approximately 71% of revenue under the cash-basis 90/10 calculation from Title IV programs; about 19% of cash-basis revenue came from veterans’ benefits. A regulatory change affecting these funding sources could materially affect enrollment, liquidity and results.
Risks, contingencies and unusual items
- Regulatory and accreditation exposure: Long Beach campus renewal had unresolved ACCSC findings concerning hybrid-distance education, credit-hour calculations and leave-of-absence policy. ED’s Avondale-related program review had nine findings described by UTI as nonmaterial; the final determination was pending. Several individual programs had missed accreditation graduation or employment benchmarks, and Houston had a program on heightened monitoring.
- Gainful-employment rules: The first final debt-to-earnings rates showed nine of 12 programs passing and three in the zone; none failed. Future rates and revised federal rules were uncertain. Loss of Title IV eligibility for a program could undermine its viability.
- Funding concentration: Dependence on Title IV aid and veterans’ benefits exposes the business to legislative, budgetary and regulatory changes. UTI also noted restricted military-base recruiting access and possible changes to the 90/10 rule.
- Preferred stock: Coliseum invested $70 million in Series A preferred stock in 2016. It carries a 7.5% annual cash-dividend rate, with a higher accrued-dividend rate if cash dividends are not paid, and has senior liquidation rights. Regulatory and stockholder approvals could affect conversion and voting rights; UTI disclosed that Coliseum’s voting power could rise substantially if required approvals were obtained.
- Legal matter: A Massachusetts Attorney General investigation concerning alleged false claims related to student aid at the Norwood campus remained unresolved. UTI had not recorded a liability and said it could not estimate the matter’s outcome or costs.
- Student loans and accounting: UTI bears credit and collection risk on its proprietary loan program. At year-end, related unrecognized balances were $66.0 million; $18.3 million was written off during FY2017. The company expected ASC 606 adoption to increase opening equity and receivables by approximately $33–$38 million, subject to final assessment.
Deloitte issued unqualified opinions on the FY2017 consolidated financial statements and on internal control over financial reporting. Management also concluded disclosure controls were effective as of September 30, 2017.
Important facts for investors to verify
- Whether enrollment and student starts recover as projected, and whether the expected FY2018 revenue and operating-loss guidance is achieved.
- Final outcomes of ACCSC renewal and monitoring matters, the ED program review, and federal gainful-employment and borrower-defense rulemaking.
- Actual liquidity available after distinguishing unrestricted cash and investments from restricted cash, and the cash impact of leases, campus expansion and preferred dividends.
- Collection performance, write-offs and the financial-statement effects of adopting ASC 606 for the proprietary student-loan portfolio.
- The status and potential financial or regulatory consequences of the Massachusetts investigation and any other material legal contingencies.