Universal Technical Institute, Inc. — Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2013. The company provides postsecondary technical education through 11 U.S. campuses, alongside manufacturer-specific training. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Revenue | $95.1; down 10.5% year over year | $193.5; down 9.0% |
| Operating income (loss) | $(1.9), versus $3.0 | $4.1, versus $10.3 |
| Net income (loss) | $(0.9), versus $1.9; diluted EPS $(0.04), versus $0.08 | $2.6, versus $6.4; diluted EPS $0.11, versus $0.26 |
| Operating margin | (2.0)%, versus 2.8% | 2.1%, versus 4.9% |
| EBITDA, as reported by the company | $4.2, versus $9.5 | $16.3, versus $23.5 |
For the six months, operating cash flow was $7.6, down from $15.6. Investing activities used $14.8, including $4.2 of property and equipment purchases; financing activities used $9.9, principally dividends of $4.9 and share repurchases of $5.4. Cash and cash equivalents fell to $28.5 from $45.7 at September 30, 2012. At March 31, cash plus current investments totaled $79.3; current assets were $113.6 and current liabilities $84.3.
Total liabilities were $115.7, including a $10.7 construction liability; the balance sheet reports no borrowings. The company had $65.8 of held-to-maturity investments and $87.5 of investments measured at fair value. It declared dividends of $0.10 per share in each of the December and March quarters, or $0.20 per share for the six months. It repurchased 556,100 shares for approximately $5.4 during the six months.
Material changes and operating trends
- Average undergraduate full-time enrollment declined 10.2% for the quarter and 9.8% for the six months. New student starts fell 14.7% and 16.4%, respectively, to about 2,900 and 5,600.
- Management attributed the revenue decline principally to lower enrollment; tuition increases of 3%–5%, depending on program, partly offset the effect. Lower compensation, benefits, bonuses and advertising reduced expenses, but not enough to preserve margins.
- Quarterly educational services and facilities expense was $50.5, down from $53.4; selling, general and administrative expense was $46.6, down from $49.8. Costs remain relatively fixed as enrollment changes.
- Revenue excluded $5.2 for the quarter and $11.0 for the six months related to the proprietary student loan program, because collectability was not considered reasonably assured. The company reported $55.6 of related loans outstanding off balance sheet and approximately $68.7 of committed student loans at March 31. Six-month program write-offs were $2.5.
- Prior-year comparative income figures were revised for identified prior-period errors; management stated the errors were not material to the affected prior periods.
Outlook, risks and contingencies
- Management expected 2013 new student starts to decline by the mid-to-high single digits and revenue to decline by a high-single-digit percentage. It expected starts to remain lower in the third quarter, with possible year-over-year improvement in the fourth quarter. Despite significantly lower expected second-half expenses, management anticipated lower full-year operating margin and net income than in 2012.
- The bank providing the proprietary loan program exercised its termination right, initially effective April 30, 2013, then extended the agreement through June 29. UTI was negotiating with replacement banks and considering alternatives; it bears the credit and collection risk on loans it purchases.
- Management identified constraints on student recruitment and starts, including reduced Title IV aid, the funding gap students must finance, changes to admissions compensation rules, competition, economic conditions and student willingness or ability to take on debt.
- Federal False Claims Act allegations involving enrollment-counselor compensation are under preliminary Department of Justice investigation. A former employee also filed a Department of Labor whistleblower complaint. Massachusetts authorities are investigating allegations concerning student aid claims at the Norwood campus, and the accreditor requested related documentation. The company reported no liability for these matters and said outcomes and potential costs could not be estimated.
- The Department of Education’s gainful-employment rules remained vacated following a March 2013 court decision; the Department could appeal, and new negotiated rulemaking was expected to begin in September 2013. UTI reported continuing accreditation of its Norwood campus through July 2017.
- Planned integration of Automotive Technology and Diesel Technology II curricula at additional campuses was expected to involve $0.8–$0.9 of capitalized costs and $0.6–$0.7 of operating expense in fiscal 2013. Lisle campus construction in progress included $10.7. Future minimum operating lease payments totaled $209.9.
- The company said cash flows, cash and investments should meet working-capital, capital-expenditure and other liquidity needs for the next 12 months. It cautioned that seasonal enrollment patterns and a fixed-cost base can make quarterly results volatile.
Most important facts for investors to verify
- Whether starts and enrollment stabilize, and whether the company achieves its projected 2013 revenue decline and expense reductions.
- Availability and terms of replacement financing for the proprietary loan program, and the resulting effect on student starts, collections, write-offs and reported revenue.
- Developments, potential financial exposure and regulatory consequences related to the DOJ, Department of Labor and Massachusetts investigations.
- Liquidity after dividends, share repurchases, campus construction and curriculum investments, alongside the company’s substantial lease commitments.
- Regulatory developments affecting gainful employment and financial aid, and whether the Norwood accreditation status remains unchanged.