Universal Technical Institute, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015. The company provides postsecondary technical education and manufacturer-specific training through 12 U.S. campuses. Financial figures below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $89.8 | $95.7 |
| Operating income (loss) | $(2.2) | $5.6 |
| Operating margin | (2.4)% | 5.8% |
| Net income (loss) | $(1.7) | $3.1 |
| Diluted earnings (loss) per share | $(0.07) | $0.12 |
| Operating cash flow | $(3.6) | $2.0 |
| EBITDA, non-GAAP | $2.9 | $11.1 |
- Revenue declined 6.2%. Average undergraduate full-time enrollment fell 8.3% to approximately 13,300; new student starts declined 5.3% to approximately 1,800. Tuition increases of 2%–4% partly offset the enrollment-related revenue decline.
- Educational services and facilities expense rose 3.8% to $49.7 million; SG&A was broadly flat at $42.3 million. Long Beach, opened in August 2015, contributed $1.9 million of revenue and $4.7 million of operating expenses, including allocated overhead.
- Cash and cash equivalents were $32.4 million at December 31, 2015, versus $29.4 million at September 30. Cash plus current investments totaled $51.5 million. Current assets were $103.4 million and current liabilities $89.3 million.
- Investments totaled approximately $20.1 million at amortized cost. Financing obligations were $44.6 million, including $0.8 million current. The filing does not identify conventional borrowings as a separate debt balance.
- Investing activities provided $7.7 million, mainly from investment maturities; financing activities used $1.1 million, primarily for dividends. Property and equipment purchases were $2.6 million. The company reported no material change in market risk.
Material changes and management outlook
- Enrollment weakness drove an estimated $8.4 million revenue reduction, with tuition increases providing a partial offset. Operating results shifted from profit to loss, and EBITDA fell substantially year over year.
- For FY2016, management expected new starts to decline by low-to-mid single digits and average student population by mid-to-high single digits versus FY2015. Revenue was expected to decline approximately 3%–5%; investment in growth was expected to reduce operating income and leave EBITDA at minimal levels.
- FY2016 capital expenditures were forecast at $19.5–$20.5 million, including about $2.1 million for a future campus and $6.0 million for expansion of existing programs. Management believed cash, investments, and operating cash flows would meet liquidity needs for the next 12 months.
- The company cited increasing competition, restrictions on military-base recruitment, student price and debt sensitivity, and industry-wide adverse publicity as challenges to starts. It was evaluating changes to admissions compensation following Department of Education guidance; enrollment-based compensation remained prohibited.
- Graduate employment rates for 2015 graduates were below the prior-year comparable rate, which management attributed partly to an employment-verification backlog. The Long Beach campus was an early-stage operating cost burden. The Honda PACT program at Lisle was discontinued in January 2016 due to low student interest.
Risks, contingencies, and unusual items
- The company relies substantially on federal Title IV aid and veterans’ benefits. The proprietary student loan program leaves the company with credit and collection risk; related loans and deferred tuition are not recognized on the balance sheet because collectability is not considered reasonably assured.
- At December 31, the proprietary loan program had $78.7 million of unrecognized outstanding balances, including loans, accrued interest, and origination fees. Net tuition and interest income excluded during the quarter was $5.1 million; cumulative excluded amounts were $111.3 million. The company had committed to approximately $126.1 million of loans since inception.
- Inquiries remained pending from the Massachusetts Attorney General regarding Norwood campus matters and from the U.S. Attorney’s Office for the Western District of North Carolina regarding Mooresville operations, the 90/10 rule, and other practices. The company was cooperating and had not accrued liabilities; outcomes and potential costs could not be estimated.
- A software vendor’s additional license and maintenance fees were disputed; an immaterial expense was recorded. A tax benefit of $0.9 million was reported for the quarter. Management estimated potential FY2016 deferred-tax-asset write-off expense of $1.4–$1.7 million, subject to stock price and award activity.
- In February 2016, the company invested $0.7 million in cash and converted a $0.3 million note receivable for a 25% interest in a technician-development and shop-services company, and entered a licensing agreement.
Important facts for investors to verify
- Whether enrollment and student starts stabilize, and whether the forecast revenue decline and minimal EBITDA expectations are achieved.
- Cash generation and liquidity as the company funds Long Beach, future campus plans, and the forecast $19.5–$20.5 million of capital expenditures.
- Credit performance and cash collections in the proprietary loan program, including the substantial unrecognized balance.
- Developments and potential financial or operational effects of the Massachusetts and North Carolina investigations, and the disputed software-vendor fees.
- Progress on graduate employment verification and relevant accreditation and veterans-benefit approvals, including the Texas program approval due to expire April 15, 2016.