Universal Technical Institute, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2015. Unaudited results; financial amounts below are in millions unless stated otherwise. UTI operates 11 U.S. campuses offering technical career education and manufacturer-specific training.
Financial results and liquidity
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $85.1 | $272.0 |
| Operating income (loss) | $(4.0) | $4.0 |
| Net income (loss) | $(3.0) | $0.7 |
| Operating margin | (4.7)% | 1.5% |
| Net margin | (3.5)% | 0.2% |
| EBITDA, non-GAAP | $1.3 | $20.1 |
- For the nine months, operating cash flow was $(0.2) million, versus $9.8 million provided in the comparable 2014 period. Investing and financing activities used $14.0 million each.
- Cash and cash equivalents were $10.9 million at June 30, down from $39.0 million at September 30, 2014. Cash plus current investments was $55.4 million. Total assets were $263.2 million.
- Total liabilities were $139.8 million. Financing obligations were $32.6 million, including $0.7 million current; the filing reports no separate conventional borrowing balance.
- Cash dividends were $0.10 per share each quarter, totaling $7.3 million for the nine months. UTI repurchased 748,000 shares for $6.1 million during the nine-month period.
Changes versus prior comparable periods
- Quarterly revenue fell 6.8% from $91.3 million; nine-month revenue fell 3.9% from $283.1 million. Average undergraduate full-time enrollment declined 9.7% for the quarter and 7.6% for the nine months. Tuition increases of 2%–4%, depending on program, partially offset lower enrollment.
- The quarter shifted from $1.0 million operating income and $0.4 million net income in 2014 to operating and net losses. For the nine months, operating income rose from $2.5 million to $4.0 million and net income from $0.5 million to $0.7 million, despite lower revenue.
- Quarterly advertising expense increased $3.0 million to $12.1 million. Nine-month costs declined overall, helped by lower compensation, contract services and bad-debt expense; advertising rose $3.7 million to $33.9 million.
- Nine-month operating cash flow declined from $9.8 million to $(0.2) million, primarily reflecting a $16.0 million decrease in deferred revenue and $4.7 million of cash used from income-tax timing.
Outlook, risks and notable items
- Management maintained its fiscal 2015 outlook: revenue expected to decline approximately 3%–4%; new student starts and average student population expected to be down mid-single digits. Excluding new-campus pre-opening costs, management expected year-over-year operating-income growth and was cautiously optimistic about slight fourth-quarter growth in new starts.
- UTI expected $2.8–$3.2 million of additional Long Beach campus pre-opening costs for the fiscal year, following approximately $2.0 million incurred through June, and expected the campus to become profitable in 2016. It also forecast $11–$12 million of remaining fiscal-year capital expenditures, primarily for Long Beach and equipment.
- UTI said cash flows, cash and investments should meet liquidity needs for the next 12 months. Results are seasonal, with typically lower summer enrollment and quarterly volatility.
- Regulatory exposure includes new federal gainful-employment rules effective July 1, 2015; programs could lose Title IV eligibility after specified failures of debt-to-earnings measures. The first official outcomes were expected in 2016, with earliest possible program ineligibility in 2017. An Education Department review of the Avondale campus was ongoing.
- UTI said Texas regulators could withdraw approval as early as August 15, 2015 for veterans to use benefits for certain Dallas/Fort Worth programs if an acceptable delivery method was not established. Those veteran students generated approximately $4.5 million of revenue in the first nine months of fiscal 2015.
- UTI disclosed a Massachusetts Attorney General inquiry and a July 17, 2015 subpoena from the U.S. Attorney’s Office for the Western District of North Carolina concerning, among other matters, campus operations and 90/10 compliance. Outcomes, costs and operational effects were not predictable; no liability was recorded for either inquiry.
- The proprietary student loan program leaves UTI bearing credit risk. Loans, related tuition and deferred revenue are not recorded on the balance sheet because collectability is not reasonably assured. The unrecognized program balance was $74.6 million at June 30; cumulative net amounts excluded from revenue since inception were $61.9 million.
- Other notable items: UTI purchased most of its Houston campus property for $9.4 million; Long Beach construction was accounted for as a build-to-suit arrangement with UTI bearing construction risk. UTI also entered a Roush Yates curriculum and licensing arrangement.
Important facts for investors to verify
- Enrollment, student starts and fourth-quarter pacing against management’s full-year expectations.
- Cash generation, deferred-revenue movements, capital spending and liquidity after dividends and repurchases.
- Texas veterans-benefit approval and the potential effect on Dallas/Fort Worth enrollment and revenue.
- Results of the federal and state inquiries, Education Department review, and gainful-employment program outcomes.
- Collections and write-offs in the proprietary loan program, including the unrecognized $74.6 million balance.