Universal Technical Institute, Inc. — Q3 2013 Form 10-Q
Business and period: UTI provides postsecondary technical education through 11 U.S. campuses and related manufacturer training programs. This unaudited report covers the three and nine months ended June 30, 2013; comparisons are with the same 2012 periods unless stated otherwise. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $91.0 | $99.6 | $284.5 | $312.3 |
| Operating income | $0.5 | $1.5 | $4.5 | $11.9 |
| Operating margin | 0.5% | 1.5% | 1.6% | 3.8% |
| Net income | $0.3 | $1.0 | $2.9 | $7.4 |
| Diluted EPS | $0.01 | $0.04 | $0.12 | $0.30 |
| EBITDA (non-GAAP) | $6.4 | $7.6 | $22.7 | $31.0 |
- Cash flow: Nine-month operating cash flow was $5.4 million, versus $9.2 million in 2012. Investing activities used $14.6 million and financing activities used $12.5 million. Cash and cash equivalents fell to $23.9 million from $45.7 million at September 30, 2012.
- Liquidity and balance sheet: Cash plus current investments totaled $73.3 million at June 30. Current assets were $105.7 million and current liabilities $75.8 million. Total assets were $259.7 million; total liabilities were $119.3 million. The balance sheet presents no borrowings under a debt caption. Construction liability rose to $23.7 million from $2.4 million, primarily related to the Lisle, Illinois campus project.
- Capital returns: UTI paid $7.4 million in dividends and repurchased $5.4 million of shares during the nine months. Dividends declared were $0.30 per share, compared with $0.20 in the prior-year period.
Changes versus prior period
- Revenue fell 8.7% in Q3 and 8.9% for the nine months. Average undergraduate full-time enrollment declined 9.8% in Q3 and 10.1% year to date; new starts declined 7.4% and 13.8%, respectively.
- Lower enrollment was the principal revenue pressure. Tuition increases of 2%–4%, depending on program, partly offset the enrollment decline.
- Operating expenses declined, but less than revenue: operating expenses were 99.5% of Q3 revenue versus 98.5% a year earlier, and 98.4% versus 96.2% for the nine-month periods. Cost reductions included lower compensation, bonuses and advertising.
- Management reported $15.4 million of tuition related to proprietary-loan students excluded from reported revenue during the nine months, compared with $10.1 million in 2012. The company recognizes related tuition and interest as collected because collectability is not considered reasonably assured.
Outlook, risks and other notable items
- Management outlook: UTI expected full-year 2013 starts to decline by mid-single digits and revenue to decline by a high-single-digit percentage versus 2012. Management expected lower expenses but continued declines in operating margin and net income. It anticipated higher starts in Q4 2013 and positive start growth over the following six months, while noting quarterly seasonality and volatility.
- Enrollment challenges: Management cited reduced Title IV aid relative to tuition, admissions compensation restrictions, greater competition, economic conditions and students’ willingness or ability to take on debt. Q3 inquiries and applications increased significantly year over year, but management cautioned that effects on revenue may take several months.
- Student lending: The former bank ended its proprietary-loan agreement; a replacement bank began accepting applications June 29, 2013, on substantially similar terms. UTI bears credit and collection risk. Loans and related deferred tuition are not recorded on the balance sheet; the reported program balance was $55.8 million, and commitments to provide student loans were approximately $70.9 million.
- Regulation and investigations: The Department of Education was preparing negotiated rulemaking on gainful-employment standards and other Title IV issues. UTI also disclosed a DOJ preliminary investigation concerning alleged Title IV incentive-compensation violations, a related whistleblower complaint, and a Massachusetts investigation concerning student aid claims. Outcomes and potential costs were not estimable; no related liabilities were recorded. The filing states that pending proceedings could adversely affect the company.
- Investment and campus plans: The company expected additional capital spending and above-normal operating costs as it integrates automotive and diesel curricula at additional campuses, including $0.3–$0.4 million of additional operating expense expected in the September 2013 quarter. A new GM-related elective program was expected to begin in early 2014.
- Other: Management said cash, investments and operating cash flow should meet working-capital and other liquidity needs for at least 12 months. It also noted that income taxes for 2013 interim periods were calculated using actual results because the annual effective tax rate could not be reliably estimated.
Key facts for investors to verify
- Whether enrollment starts and applications recover as management anticipated, and whether that recovery translates into revenue and improved margins.
- The performance and credit losses of the proprietary-loan portfolio, including the effect of the bank transition and the treatment of unrecognized tuition.
- Developments in federal and state investigations, Title IV rulemaking, and any resulting financial, operating or accreditation consequences.
- Funding and completion costs for the Lisle campus and other planned curriculum integration, alongside continued dividends and share repurchases.
- Cash-flow trends, particularly the effects of deferred revenue and student-start timing; the filing describes these as significant drivers of operating cash flow.