UNIVERSAL TECHNICAL INSTITUTE INC annual report, FY2013

Universal Technical Institute, Inc. — FY2013 Form 10-K

Reporting period: Fiscal year ended September 30, 2013. The filing also reports fourth-quarter results for the three months ended September 30, 2013. UTI provides postsecondary technical education and advanced manufacturer training through 11 U.S. campuses.

Key financial and operating metrics

MetricFY2013FY2012
Revenue$380.3 million$413.6 million
Operating income$5.9 million; 1.6% margin$14.1 million; 3.4% margin
Net income$3.8 million$9.0 million
Diluted EPS$0.15$0.36
EBITDA (company-defined, non-GAAP)$29.8 million$39.5 million
Operating cash flow$26.7 million$18.5 million
Cash and cash equivalents$35.7 million$45.7 million
Investments$61.7 million$56.0 million
Working capital$41.0 million$35.5 million
BorrowingsNo short- or long-term borrowingsNot stated in this comparison

Average undergraduate full-time enrollment was approximately 15,000, down 9.1% from 16,500. The company paid $9.8 million in dividends and repurchased approximately $5.4 million of shares. Cash and investments together totaled approximately $93.2 million at year-end.

Changes versus the prior comparable year

  • Revenue declined 8.0%; the company attributed approximately $39.8 million of lower revenue to reduced average enrollment, partly offset by tuition increases of 2%–4%.
  • Operating income fell approximately 58%, and net income fell approximately 58%. Operating expenses declined, but less than revenue, reflecting the company’s relatively fixed cost base.
  • Operating margin decreased from 3.4% to 1.6%; net margin decreased from 2.2% to 1.0%.
  • Operating cash flow increased from $18.5 million to $26.7 million, primarily due to changes in operating assets and liabilities. Deferred revenue decreased, creating a $5.7 million cash outflow.
  • Title IV funds represented approximately 68% of revenue on the Department of Education’s cash-basis measure, versus 75% in FY2012. Veterans’ benefits rose to approximately 18% from 9%.

Outlook, risks and unusual items

  • FY2014 outlook: Management expected high-single-digit application growth but relatively flat new-student starts, citing conversion timing and one fewer start date in the first quarter. It forecast low-single-digit revenue growth and said it expected “meaningful growth in operating results,” while noting normal quarterly volatility.
  • Management expected $5.9–$6.3 million of capital investment in FY2014 for curriculum integration and related equipment, plus approximately $3.6 million of operating expense for integration activities.
  • Student affordability, competition, macroeconomic conditions, enrollment trends, and the ability to recruit and retain students are material business risks. The company reported underutilized campus capacity and a proprietary student loan program for which it bears credit and collection risk.
  • Regulatory exposure is significant: Title IV eligibility, accreditation, student-loan default rates, veterans’ benefits rules, and potential gainful-employment regulations could affect enrollment, funding, or operations. One campus was near the 35% veterans-benefit student limit; the other 10 were below 30% as of November 1, 2013.
  • The former employee’s False Claims Act and Department of Labor complaints were settled and dismissed; the company reported approximately $0.4 million of settlement expense after insurance contribution and denied liability. A Massachusetts Attorney General investigation remained unresolved, and the company recorded no liability because the outcome and costs were uncertain.
  • At September 30, 2013, contractual commitments totaled $324.1 million, including $209.1 million of operating lease commitments. The Lisle campus construction was accounted for as a financing obligation; construction was completed in November 2013 and the facility entered service in December.
  • The proprietary loan program’s former bank terminated its agreement; a new bank began accepting applications June 29, 2013 on substantially similar terms. At year-end, the program had $59.8 million of unrecognized outstanding loan balances, and cumulative tuition and interest excluded from revenue was $43.8 million net of amounts collected and written off.

Important facts for investors to verify

  • Track enrollment, new starts, persistence, and conversion of applications into starts against management’s FY2014 outlook.
  • Review the collectability and write-offs of proprietary student loans, and their effect on cash receipts and reported revenue.
  • Monitor Title IV and veterans’ funding concentration, cohort default rates, campus benefit limits, and developments in gainful-employment rules.
  • Follow the status and potential costs of the Massachusetts investigation and any remaining accreditor inquiries.
  • Assess whether cost reductions, campus utilization, and curriculum investment can restore operating margins while supporting student outcomes.
  • Consider the scale of lease and construction-related obligations alongside the reported cash, investments, and absence of borrowings.