Universal Technical Institute, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2016; unaudited. Unless otherwise indicated, amounts are in millions of dollars. UTI operates 12 U.S. campuses offering technical career education and manufacturer-specific training.
Financial performance
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Revenue | $88.2; down 3.3% year over year | $178.0; down 4.8% |
| Operating income (loss) | $(5.8), versus $2.4; operating margin (6.5%) | $(8.0), versus $8.0; operating margin (4.5%) |
| Net income (loss) | $(32.0), versus $0.6; diluted loss per share $1.32 | $(33.7), versus $3.6; diluted loss per share $1.39 |
| EBITDA (non-GAAP) | $(0.6), versus $7.8 | $2.3, versus $18.9 |
| Operating cash flow | $(2.5), versus $8.7 in the prior-year six-month period |
Lower enrollment drove the revenue decline: average undergraduate full-time enrollment fell 9.0% in the quarter and 9.3% for the six months. New starts decreased 14.8% in the quarter and 8.9% for the six months. Tuition increases of up to 5%, depending on program, partly offset the volume decline. For the quarter, educational services and facilities expense rose to $49.8 million and SG&A to $44.2 million, increasing total operating costs despite lower revenue.
The net loss chiefly reflects a $27.9 million income-tax expense from increasing the valuation allowance on deferred tax assets. UTI recorded a full valuation allowance of $28.4 million; the charge was non-cash. The company cited quarterly pretax losses, weaker enrollment indicators and projections of a three-year cumulative loss position as negative evidence.
Financial position and liquidity
At March 31, 2016, cash and equivalents were $40.4 million and current investments were $10.1 million, or $50.5 million combined; restricted cash was $2.4 million. Current assets were $87.7 million and current liabilities $81.4 million. Total assets were $229.9 million, down from $274.3 million at September 30, 2015; shareholders’ equity fell to $81.1 million from $113.5 million.
The filing reports financing obligations of $44.4 million in total ($0.8 million current and $43.6 million long-term). It does not provide a clear conventional-borrowings balance in the supplied text. Six-month investing cash inflow of $15.3 million included $19.3 million of investment maturities; capital expenditures were $4.9 million. UTI paid $1.5 million in dividends during the period.
Outlook, risks and notable items
- For FY2016, management expected starts and average student population to decline by mid- to high-single-digit percentages versus FY2015, revenue to decline approximately 5%–6%, and EBITDA to be minimal. Planned capital expenditures were reduced to $9–$10 million. Management cautioned that quarterly results are seasonal and may be volatile.
- UTI said cash, investments and operating cash flows should meet working-capital and other needs for the next 12 months, but its regulatory composite score was under pressure. If it falls below 1.0, UTI may need a letter of credit, provisional certification, additional monitoring, or a nonstandard Title IV funding arrangement.
- The Long Beach campus, opened in August 2015, generated $2.6 million of quarterly revenue and $5.0 million of operating expenses, including allocated overhead; for the six months, it generated $4.5 million of revenue and $9.8 million of expenses.
- Under UTI’s proprietary student loan program, the company bears credit and collection risk. Loans and related deferred tuition are not recorded on the balance sheet because collectability is not considered reasonably assured. The unrecognized program balance was $75.5 million at March 31; $7.7 million was written off in the six-month period. Net tuition and interest excluded during the six months was $8.8 million.
- A Massachusetts Attorney General investigation remains unresolved; UTI said scope, duration and outcome could not be predicted and recorded no liability. The U.S. Attorney’s Office confirmed UTI and NASCAR Technical Institute were not subjects or targets of its inquiry after UTI complied with a subpoena. The Texas State Approving Agency’s approval of modified veteran program delivery at the Dallas/Fort Worth campus remained pending.
- Graduate employment rates for 2015 graduates were below the prior-year level, which UTI attributed partly to an employment-verification backlog; management reported some improvement in the year-over-year variance. UTI planned to introduce welding and CNC machining programs in FY2017 and continued evaluating another campus location.
- UTI acquired BrokenMyth Studios for $1.5 million, with up to $0.9 million of contingent consideration, and invested $1.0 million for a 25% interest in Pro-MECH. The board may change or discontinue dividends.
Important facts for investors to verify
- Whether new starts, enrollment and graduate employment verification improve, and whether this stabilizes revenue and operating performance.
- Whether the deferred-tax valuation allowance can be reversed if future taxable-income evidence improves.
- UTI’s composite score trajectory and any resulting effects on Title IV certification, funding terms or liquidity.
- Collection performance, write-offs and cash requirements under the proprietary loan program, including the significance of tuition revenue not recognized.
- Developments in the Massachusetts investigation and Texas veteran-program approval, and the financial performance of Long Beach and the new investments.