Universal Technical Institute, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012. Financial statements are unaudited; amounts below are in millions except per-share data and enrollment.
Business context and results
UTI provides postsecondary technical education through 11 U.S. campuses, with manufacturer-specific training operations. Average undergraduate full-time enrollment declined 10.8% in the quarter to about 15,300 and 10.9% for the nine months to about 16,800. Postsecondary education generated $97.2 million of quarterly revenue; other operations generated $2.4 million.
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Nine months ended June 30, 2012 | Nine months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $99.6 | $108.9 | $312.3 | $340.5 |
| Operating income | $1.5 | $6.7 | $11.9 | $34.9 |
| Operating margin | 1.5% | 6.2% | 3.8% | 10.3% |
| Net income | $1.0 | $4.0 | $7.4 | $21.3 |
| Diluted EPS | $0.04 | $0.16 | $0.30 | $0.86 |
| EBITDA (non-GAAP) | $7.6 | $13.2 | $31.0 | $54.4 |
Financial position and cash flow
- At June 30, cash and cash equivalents were $58.5 million and investments totaled $45.5 million; cash plus current investments was $92.1 million. Total current assets were $125.1 million against current liabilities of $91.2 million.
- Total assets were $257.7 million; total liabilities were $110.3 million and shareholders’ equity was $147.4 million. The balance sheet reports no borrowings or debt balance.
- Nine-month operating cash flow was $9.2 million, down from $31.6 million. Investing activities provided $2.1 million, including investment maturities exceeding purchases; property and equipment purchases were $7.0 million. Financing used $6.4 million, including $4.9 million of dividends and $1.6 million of share repurchases.
- Deferred revenue fell to $44.5 million from $61.4 million at September 30, 2011, contributing a $16.9 million operating cash outflow. Management attributed this primarily to student-start timing, enrollment, and students’ progress through programs.
- The company declared dividends of $0.20 per share during the first nine months and said it intends to pay quarterly dividends at the Board’s discretion. A $25 million repurchase authorization remained in place; $1.6 million had been used through June 30.
Changes, outlook and management commentary
- Revenue declined 8.6% for the quarter and 8.3% year to date, principally reflecting lower enrollment; tuition increases of 3%–5% by program partly offset the decline. Net income fell to $1.0 million for the quarter and $7.4 million for nine months.
- Operating expenses decreased overall, but SG&A increased to $45.5 million for the quarter and $142.6 million for nine months. Advertising rose by $2.0 million and $7.4 million, respectively, as UTI sought to generate student inquiries and starts. Advertising was about 10% of revenue; management forecast 10%–11% for fiscal 2012.
- Management expected full-year average student population to decline versus 2011, revenue to decline by a mid- to high-single-digit percentage, and operating margins to decline. Student starts for the rest of 2012 were expected to be relatively consistent with the prior-year period. Management cited macroeconomic headwinds, student-financing challenges, and lower beginning enrollment.
- UTI expected fourth-quarter 2012 advertising expense to increase year over year. It also expected approximately $2.0 million of operating expense and $3.0–$3.3 million of capitalized costs in fiscal 2012 for integrating Automotive Technology and Diesel Technology II curricula at its Avondale campus.
- Capacity utilization was 54.8% for the quarter versus 58.1% a year earlier. Graduate employment for 2011 graduates was slightly below the prior-year comparison through June 30; management expected the overall rate to remain consistent with or slightly below prior-year levels.
- Management stated that cash, investments, and operating cash flows should meet working-capital, capital-expenditure, and other liquidity needs for at least 12 months.
Risks, contingencies and unusual items
- Proprietary student loan program: UTI assumes the credit and collection risk on loans it purchases for students. At June 30, it had committed approximately $48.9 million under a program with up to $60 million of aggregate credit. Outstanding program balances of $36.7 million are not recorded as assets because collection is not considered reasonably assured. Nine-month revenue excluded $10.1 million of tuition related to program participants; the note reports $5.5 million as the net amount excluded after collections and write-offs. Loan write-offs were $5.6 million for the nine months.
- Government investigations and complaint: The Department of Justice notified UTI of a preliminary False Claims Act investigation following a former employee’s allegations concerning enrollment-counselor compensation and other potential issues. The same former employee filed a Sarbanes-Oxley whistleblower complaint with the Department of Labor. UTI said it would cooperate and defend the claims; it had not accrued a liability for the DOL matter because the outcome and potential cost could not be estimated.
- Regulatory exposure: Changes to Pell Grant eligibility and the elimination, beginning July 1, 2012, of ability-to-benefit eligibility for first-time students may affect student financing and enrollment. A federal court struck down the gainful-employment metrics on June 30, 2012; the Department of Education’s next steps were unclear. Proposed changes to the 90/10 rule could also affect the business. UTI reported renewed Department of Education approval for its Texas institution through March 31, 2018.
- Prior-period revisions: UTI recorded immaterial prior-period corrections, including $0.8 million of bad-debt expense relating to earlier student-funding processing issues and $0.3 million of previously unaccrued compensation. It revised the September 30, 2011 balance sheet for the compensation correction; the filing says the adjustments did not affect the 2011 income or cash-flow statements shown.
- Management said it did not believe pending legal proceedings would have a material adverse effect overall, while noting it could not predict or estimate the DOL complaint’s outcome or cost. It also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether enrollment and student starts stabilize, and whether the company meets its projected fiscal 2012 revenue and margin trends.
- Cash generation and liquidity, particularly the effects of deferred-revenue movements and the timing of Title IV disbursements.
- Collections, write-offs, and remaining commitments under the proprietary loan program, including the unrecorded $36.7 million balance.
- Developments and potential financial exposure from the DOJ investigation, DOL complaint, and evolving education-funding regulations.
- Execution costs and enrollment benefits from the curriculum integration, and the sustainability of dividends and any further share repurchases.