UNIVERSAL TECHNICAL INSTITUTE INC quarterly report, Q1 FY2012

Universal Technical Institute, Inc. — Q1 FY2012 10-Q

Reporting period: Three months ended December 31, 2011; comparisons are with the three months ended December 31, 2010 unless noted. The company operates 11 postsecondary technical-education campuses and also provides manufacturer-specific training. Financial amounts below are in millions of dollars unless stated otherwise.

Financial results and liquidity

Metric	Q1 FY2012	Q1 FY2011
Revenue	$106.4	$117.4
Operating income / margin	$6.6 / 6.2%	$16.9 / 14.3%
Net income / margin	$4.0 / 3.8%	$10.3 / 8.7%
Diluted EPS	$0.16	$0.42
EBITDA (non-GAAP)	$13.2	$23.3
Cash from operating activities	$5.6	$11.7

Revenue fell 9.4%; average undergraduate full-time enrollment declined 10.7%, to approximately 18,300. About 3,300 students started, roughly consistent with the prior-year quarter.
Educational services and facilities expense decreased to $51.7 million from $53.8 million. SG&A increased to $48.2 million from $46.8 million, including a $2.5 million increase in advertising.
Cash and cash equivalents were $51.1 million at December 31, 2011, versus $53.7 million at September 30. Current investments were $53.9 million; cash plus current investments totaled $104.9 million. Current assets were $134.7 million and current liabilities $98.4 million.
Capital expenditures were $1.5 million; investing cash outflow was $8.1 million, mainly reflecting net investment purchases. No borrowings or interest-bearing debt are listed on the balance sheet.
Deferred revenue declined to $54.1 million from $61.4 million. Total liabilities were $116.8 million and shareholders’ equity was $147.3 million at quarter-end.

Material changes and management commentary

Operating income declined 61% and net income declined 61%, primarily due to lower revenue and higher advertising spending. Operating margin contracted by 8.1 percentage points.
Management attributed the revenue decline to lower enrollment and one fewer earnings day, partly offset by program tuition increases of 4%–7%. The company excluded $2.6 million of tuition associated with its proprietary loan program from reported revenue, recognizing amounts as student payments are collected.
Average capacity utilization fell to 62.2% from 71.3% a year earlier, with total seats available increasing to 29,400 from 28,600. Management is seeking alternative uses for underutilized campus space.
Operating cash flow was lower year over year. Management cited the decline in net income and working-capital movements, including a $7.3 million cash use from lower deferred revenue.
The company authorized a new share-repurchase program of up to $25 million on December 20, 2011, replacing prior authorizations. It reported no purchases under the program during the quarter; employee tax-withholding shares should not be confused with open-market repurchases.

Outlook, risks, and unusual items

Management expected average student populations to decline for FY2012, revenue to fall by a mid- to high-single-digit percentage, and operating margins to decline versus FY2011. It expected starts to decline year over year in Q2, with potential improvement in the second half, and cautioned that results may vary by quarter.
Management anticipated advertising expense would remain higher in Q2 and Q3 to support inquiry generation. It expected education-related compensation costs to decrease for FY2012, but SG&A compensation costs to increase because of admissions compensation-plan changes following regulatory changes.
A non-Title IV federal funding agency clarification led the company to estimate a $3.6 million current liability for excess funds likely to be returned. The quarter included a $1.3 million pre-tax charge ($0.8 million after tax); $0.8 million pre-tax related to prior periods. Management said the prior-period adjustments were not material to the relevant earlier periods or expected FY2012 results.
The proprietary student loan program exposes the company to credit and collection risk. Loans and related deferred tuition are not recorded as balance-sheet assets or liabilities because collectability is not considered reasonably assured. At quarter-end, the company had committed approximately $38.7 million under a program authorized for up to $40 million; reported off-balance-sheet loan-program balances were $29.2 million. Cumulative amounts written off were $11.1 million since inception.
Federal aid changes for award year 2012–13 include tighter Pell Grant eligibility and elimination of ability-to-benefit options for certain new students. Management warned some students could receive less or no Title IV aid, potentially affecting enrollment or increasing demand for private loans. Potential rulemaking and increased Consumer Financial Protection Bureau activity were also identified as matters to monitor.
The filing states that pending legal proceedings were not expected to have a material adverse effect. Management believed cash, investments, and operating cash flows would meet liquidity needs for at least the next 12 months. Results are subject to seasonality, regulatory and funding risks, enrollment trends, affordability pressures, and student-loan collection performance.

Investor verification priorities

Track enrollment, applications, starts, capacity utilization, and graduate employment, particularly in marine, motorcycle, and collision programs.
Verify whether the $3.6 million funding-agency estimate is sufficient and monitor any repayments, further adjustments, or agency determinations.
Assess proprietary-loan commitments, defaults, write-offs, collections, and the implications of the program’s off-balance-sheet accounting.
Compare actual FY2012 revenue and operating margins with management’s mid- to high-single-digit revenue-decline and lower-margin outlook.
Monitor Title IV eligibility changes, education rulemaking, and CFPB developments for effects on student financing and enrollment.
Reconcile cash generation and investment liquidity with working-capital needs, campus utilization, capital spending, and any share repurchases.