Universal Technical Institute, Inc. — FY2011 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2011, with unaudited fourth-quarter results for the three months ended that date. UTI operates 11 campuses offering postsecondary automotive, diesel, collision repair, motorcycle and marine technician training, plus manufacturer-sponsored training. Average undergraduate full-time enrollment was approximately 18,500.
Key financial and operating metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $451.9 million | $435.9 million |
| Operating income | $45.1 million | $46.6 million |
| Operating margin | 10.0% | 10.6% |
| Net income | $27.2 million | $28.8 million |
| Diluted EPS | $1.10 | $1.18 |
| Cash flow from operations | $58.1 million | $67.5 million |
| Cash and cash equivalents | $53.7 million | $49.0 million |
| Working capital | $28.8 million | $(6.9) million |
Revenue increased 3.7%, primarily from tuition increases of 4%–7% and higher average enrollment during the first three quarters. Operating income declined about 3.1% and net income about 5.5%, as expenses grew faster than revenue. Educational services and facilities costs were 49.5% of revenue versus 48.8%; SG&A was 40.5% versus 40.6%. The effective tax rate was 40.3%.
FY2011 EBITDA, a non-GAAP measure, was $71.1 million versus $67.8 million. UTI reported no short- or long-term borrowings at year-end. Cash plus current investments totaled approximately $103.7 million; total investments were $55.9 million. Current assets were $133.5 million and current liabilities $104.7 million. Operating cash flow was $58.1 million; investing activities used $54.0 million, including $29.1 million for property and equipment. Capital expenditures included curriculum transformation, campus equipment and headquarters improvements.
Fourth quarter: Revenue was $111.4 million versus $119.2 million in Q4 FY2010; operating income was $10.2 million versus $11.8 million, and net income was $6.0 million versus $7.2 million. Quarterly results are seasonal.
Material changes and management commentary
- Average enrollment was down less than 1% year over year, but student starts fell 17.1% to 16,200 from 19,500. Capacity utilization declined to 62.7% from 68.4%.
- UTI reduced its workforce by approximately 195 employees in June 2011, recording about $4.3 million of severance costs. Compensation-plan changes responding to new Department of Education rules also affected costs and recruiting practices.
- Curriculum transformation for Automotive Technology and Diesel Technology II had received approximately $19.2 million of investment by year-end. Management planned another $3–$5 million in 2012 for rollout to additional campuses.
- Management expected FY2012 average enrollment to decline at a low-teens rate and revenue to fall by a mid- to high-single-digit rate. It did not expect FY2012 operating margins to match FY2011. Management planned tighter cost control, greater access to its proprietary loan program and more need-based scholarships.
Outlook, risks and contingencies
- Approximately 75% of FY2011 revenue, on the Department of Education’s cash basis, came from Title IV federal student aid. Changes to federal funding, eligibility rules or processing could materially affect enrollment, cash flow and results.
- New regulatory requirements include gainful-employment metrics effective July 1, 2012, revised incentive-compensation rules, state authorization standards, credit-hour requirements and expanded misrepresentation rules. UTI said its preliminary analysis indicated its programs should maintain eligibility, but acknowledged uncertainty in regulatory interpretation and implementation.
- At September 30, 2011, institution-level 90/10 percentages ranged from approximately 71% to 79%. Management estimated the percentage would be in the low-to-mid 80% range after temporary relief measures expire.
- UTI’s proprietary student loan program exposes it to credit and collection risk. It had committed approximately $34.2 million in loans; the bank deposit securing the program was $2.0 million and exceeded FDIC insurance limits. The filing gives differing outstanding-loan figures: $25.5 million in the risk discussion and $26.9 million in the financial-statement note.
- Contractual commitments included $238.6 million of operating lease payments and $42.8 million of purchase obligations. Surety bonds had a face amount of approximately $13.8 million.
- UTI disclosed ordinary-course lawsuits, investigations and claims, but stated it did not believe pending proceedings would have a material adverse effect. No proceeding to limit, suspend or terminate Title IV participation was pending, according to the filing.
- Other risks include weak graduate hiring in motorcycle, marine and collision markets, underutilized campus capacity, dependence on OEM relationships, competition, student-loan availability and potential bad-debt increases. The company reported effective internal control over financial reporting and an unmodified audit opinion.
Important facts for investors to verify
- Whether FY2012 enrollment, revenue and margin forecasts were achieved, and how new student starts and capacity utilization subsequently trended.
- The proprietary-loan portfolio’s actual balance, collection performance, write-offs and exposure to the originating bank; reconcile the filing’s $25.5 million and $26.9 million outstanding figures.
- Program-level outcomes under gainful-employment rules, continued Title IV eligibility, and the effect of regulatory changes on enrollment, recruiting costs and funding.
- Whether planned curriculum rollout spending and cost controls delivered the expected educational and financial benefits.
- Graduate employment outcomes and the sustainability of UTI’s OEM agreements, including agreements due to expire or based on verbal understandings.