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UTI > SEC Filings for UTI > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for UNIVERSAL TECHNICAL INSTITUTE INC

Form 10-Q for UNIVERSAL TECHNICAL INSTITUTE INC


30-Apr-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this report and those in our 2013 Annual Report on Form 10-K filed with the SEC on December 4, 2013. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those described under "Risk Factors" in our 2013 Annual Report on Form 10-K and included in Part II, Item 1A of this report. See also "Special Note Regarding Forward-Looking Statements" on page ii of this report. Overview

We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average undergraduate full-time student enrollment and graduates. We offer undergraduate degree and diploma programs at 11 campuses across the United States under the banner of several well-known brands, including Universal Technical Institute, Motorcycle Mechanics Institute and Marine Mechanics Institute and NASCAR Technical Institute. We also offer manufacturer specific training (MSAT) programs, including student paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers.

We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel, motorcycle and marine industries to understand their needs for qualified service professionals. Through our relationships with OEMs, we are able to continuously refine and expand our programs and curricula. We believe our industry-oriented educational philosophy and national presence have enabled us to develop valuable industry relationships which provide us with significant competitive strength and support our market leadership. We are a primary, and often the sole, provider of MSAT programs, and we have relationships with over 25 OEMs.

Participating manufacturers typically assist us in the development of course content and curricula, while providing us with vehicles, equipment, specialty tools and parts at reduced prices or at no charge. In some instances they pay for students' tuition. Our collaboration with OEMs enables us to provide highly specialized education to our students, resulting in enhanced employment opportunities and the potential for higher wages for our graduates. Our industry partners and their dealers benefit from a supply of technicians who are certified or credentialed by the manufacturer as graduates of the MSAT programs. The MSAT programs offer a cost-effective alternative for sourcing and developing technicians for both OEMs and their dealers. These relationships also support the development of incremental revenue opportunities from training the OEMs' existing employees.
2014 Overview
Operations
We started approximately 3,100 students during the three months ended March 31, 2014, which represents an increase of 6.9% as compared to the prior year comparable period. For the six months ended March 31, 2014, we started approximately 5,300 students, which represents a decrease of 5.4% as compared to the prior year comparable period. We began 2014 with a lower student population and experienced a decline in new student starts during the six months ended March 31, 2014, which contributed to declines of 2.0% and 4.5% in our average undergraduate full-time student enrollment to approximately 14,700 and 15,000 students, respectively, for the three months and six months ended March 31, 2014, respectively.


Several factors continue to challenge our ability to start new students including the following:

            The amount of Title IV financial aid available decreased during 2012
             which increased the difference between the amount of Title IV
             financial aid our students are eligible for and the cost of
             education; this difference requires students and their families to
             obtain additional financing;


            Incentive compensation changes which became effective July 1, 2011
             limited the means by which we may compensate our admissions
             representatives and required significant changes to our compensation
             and performance management processes. We are continuing to adapt to
             those changes within the organization;


            Competition for prospective students continues to increase from
             within our sector as well as with traditional post secondary
             educational institutions;


            The state of the general macro-economic environment and its impact
             on price sensitivity and the ability and willingness of students and
             their families to incur debt; and


            Unemployment; during periods when the unemployment rate declines or
             remains stable as it has in recent years, prospective students have
             more employment options.

The decline in our average undergraduate full-time student enrollment contributed to the following financial results:

            For the three months ended March 31, 2014, revenues decreased $0.4
             million, or 0.4%, to $94.7 million. The decline in revenues resulted
             in an operating loss of $1.5 million and a net loss of $1.5 million.


            For the six months ended March 31, 2014, revenues decreased $1.8
             million, or 0.9%, to $191.7 million. The decline in revenues
             resulted in operating income of $1.5 million and net income of $0.2
             million.

Additionally, our results of operations were impacted by an increase in advertising expenses, as we continue to invest in efforts to optimize our media
mix. The decline in revenues and increase in advertising expenses were partially offset by an overall decrease in compensation and benefits expenses. Our revenues for the three months and six months ended March 31, 2014 excluded $6.6 million and $12.8 million, respectively, of tuition related to students participating in our proprietary loan program.

Balancing the impact of our lower student populations and our highly fixed cost structure with our commitment to invest in our future resulted in lower operating margins for the six months ended March 31, 2014.

In response to these challenges, we continue to manage discretionary operating costs, to develop our strong industry relationships and to provide alternative financial solutions to help students achieve their educational goals. During 2013 and 2014, we increased our need-based scholarships offerings. Additionally, we continue to optimize our advertising spend, balancing the quality and quantity of inquiries, and we have implemented programs to improve the effectiveness of our admissions processes.

Build-to-Suit Lease and Investment in Unconsolidated Affiliate

As previously disclosed, in 2012 we entered into a build-to-suit lease, a construction management agreement and a joint venture related to the relocation of our Glendale Heights, Illinois campus to Lisle, Illinois. We moved into our Lisle, Illinois campus during the three months ended December 31, 2013. The transaction was structured based on the desired economic outcome which has resulted in accounting for the lease as a financing obligation and the joint venture using the equity method. See footnotes 7 and 8 to our condensed consolidated financial statements included in this Report on Form 10-Q for further discussion.

Amended Leases

In January 2014, we entered into amended lease agreements for certain buildings on our Orlando, Florida campus which extended the lease terms to August 31, 2022 and modified the scheduled rental payments. Additionally, one of the amendments included a provision which allows us to expand the square footage at one of the buildings by approximately 13,500 square feet with an associated tenant improvement allowance of approximately $1.7 million. Total project costs are estimated at approximately $2.0 million to $2.3 million and we anticipate construction will be completed in late calendar 2014. We intend to utilize this space to support the integration of our Diesel Technology II program at this campus.

Under the agreement, we have retained all construction risk and therefore, for accounting purposes, are considered the owner during the construction period. During the construction period, the existing building and the addition are considered one unit of account and accordingly we will record the existing building and a corresponding financing obligation of approximately $5.6 million on our condensed consolidated balance sheet.


Additionally, we have an imputed operating lease related to our use of the land during construction. During the construction period, the rental payment on the existing building will be allocated to imputed land lease expense and interest expense, which will then be capitalized, and the remaining portion will decrease the financing obligation, resulting in a decrease to occupancy costs of approximately $0.4 million for the year ending September 30, 2014.

We believe that we will not have continued involvement in the facility after the construction period is complete, and we anticipate that the lease will be accounted for as an operating lease. See footnote 7 to our condensed consolidated financial statements included in this Report on Form 10-Q for further discussion.

Automotive Technology and Diesel Technology II Integration

In March 2014, we began integrating the Automotive Technology and Diesel Technology II curricula at our Sacramento, California campus. We intend to integrate the new curricula at an additional campus in calendar year 2015. Currently, veteran's benefits cannot be used for funding the curricula at our California campuses but have been authorized for our Dallas/Ft. Worth, Texas and Avondale, Arizona campuses. We are in discussion with the California State Approving Agency for Veterans Education regarding the necessary approval; however we are not able to determine when, or if, the state agency will approve the funding.

As we continue to integrate the curricula at our other automotive campuses in future years, we expect to make additional capital investments and incur higher than usual operating expenses. We anticipate capitalizing an additional $3.0 million to $3.4 million of training aids and leasehold improvements and incurring an additional $1.6 million to $1.8 million in operating expenses related to these integration activities during the remainder of the year ending September 30, 2014.

Graduate Employment
Our consolidated graduate employment rate for our 2013 graduates during the six months ended March 31, 2014 is above the rate at the same time in the prior year. The rate has improved for our Automotive and Diesel Technology, Collision Repair and Motorcycle programs while the rate has declined for our Marine program.

Regulatory Environment
Gainful Employment
In 2013, the Department of Education (ED) established a negotiated rulemaking committee (the committee) to prepare proposed regulations to establish standards for programs that prepare students for gainful employment in a recognized occupation. The negotiation sessions occurred in September, November and December of 2013. The committee did not reach consensus on proposed draft regulatory language by the December 13, 2013 deadline. Without consensus, ED was authorized to write the final rule without the committee shaping its language. On March 25, 2014, ED issued a Notice of Proposed Rulemaking, which has a 60 day public comment period, to establish measures for determining whether certain postsecondary educational programs prepare students for gainful employment in a recognized occupation. ED proposed a set of conditions under which these educational programs remain eligible to participate in Title IV programs. The effective date of these regulations cannot be determined at this time, but it is likely that the rules, if adopted, would be effective on or after July 1, 2015. We cannot predict the form of the final rules that may be adopted following the comment period. Compliance with final rules could have a material impact on the manner in which we conduct our business and our results of operations. We are not able to develop reliable estimates as to the potential outcome or impact of the proposed rules because the rules are not final, the data previously provided by ED is dated and we do not have access to recent data which would be used in the proposed calculations. We continue to monitor this activity.
Program Integrity and Improvement

In February, March and April 2014, ED conducted negotiated rulemaking sessions covering a variety of topics, the following of which may be impactful to us: to the definition of adverse credit as it applies to Federal Direct PLUS loans, clock-to-credit hour conversion regulations and Title IV cash management. We continue to monitor activities relative to ED's negotiations and proposed rules for any impact to our business.


Congressional Action and Financial Aid Funding In January 2014, Congress passed an omnibus spending bill to fund the federal government through September 30, 2014, which the President signed on January 17, 2014. The bill includes several elements related to higher education and restores campus-based funding programs to pre-sequester levels. Additionally, it increases the maximum Pell grant for the 2014-15 award year from $5,645 to $5,730 per student.

2014 Outlook

Despite reporting meaningful start growth this quarter, with economic headwinds and affordability challenges persisting, we expect second half starts to be down slightly from last year. Continued expense management efforts should fund investments in the front end of the business and longer-term growth opportunities yet still lead to reductions in absolute operating expense levels both on a linked quarter basis from this quarter as well as on a year over year basis. While we expect third quarter results to be very close to break-even, we currently anticipate a stronger fourth quarter, which should lead to second half operating results being significantly better than last year's.

Results of Operations
The following table sets forth selected statements of operations data as a
percentage of revenues for each of the periods indicated.

                                          Three Months Ended March 31,         Six Months Ended March 31,
                                            2014                2013              2014              2013
Revenues                                     100.0  %             100.0  %        100.0  %           100.0 %
Operating expenses:
Educational services and facilities           53.5  %              53.0  %         53.1  %            51.8 %
Selling, general and administrative           48.1  %              49.0  %         46.1  %            46.1 %
Total operating expenses                     101.6  %             102.0  %         99.2  %            97.9 %
Income (loss) from operations                 (1.6 )%              (2.0 )%          0.8  %             2.1 %
Interest income (expense), net                (0.5 )%               0.1  %         (0.3 )%             0.1 %
Other income                                   0.2  %               0.2  %          0.3  %             0.2 %
Total other income (expense)                  (0.3 )%               0.3  %            -  %             0.3 %
Income (loss) before income taxes             (1.9 )%              (1.7 )%          0.8  %             2.4 %
Income tax expense (benefit)                  (0.3 )%              (0.7 )%          0.7  %             1.0 %
Net income (loss)                             (1.6 )%              (1.0 )%          0.1  %             1.4 %

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 and Six Months Ended March 31, 2014 Compared to Six Months Ended March 31, 2013 Revenues. Our revenues for the three months ended March 31, 2014 were $94.7 million, a decrease of $0.4 million, or 0.4%, as compared to revenues of $95.1 million for the three months ended March 31, 2013. The 2.0% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of approximately $2.0 million. The decrease was partially offset by tuition rate increases between 2% and 4%, depending on the program. Our revenues for the three months ended March 31, 2014 and 2013 excluded $6.6 million and $5.2 million, respectively, of tuition related to students participating in our proprietary loan program. In accordance with our accounting policy, we recognize the related revenues as payments are received from the students participating in this program. We recognized $0.8 million and $0.6 million of revenues and interest under the program during the three months ended March 31, 2014 and 2013, respectively.


Our revenues for the six months ended March 31, 2014 were $191.7 million, a decrease of $1.8 million, or 0.9%, as compared to revenues of $193.5 million for the six months ended March 31, 2013. The 4.5% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of approximately $8.0 million. The decrease was partially offset by tuition rate increases between 2% and 4%, depending on the program. Our revenues for the six months ended March 31, 2014 and 2013 excluded $12.8 million and $11.0 million, respectively, of tuition related to students participating in our proprietary loan program. In accordance with our accounting policy, we recognize the related revenues as payments are received from the students participating in this program. We recognized $1.5 million and $1.0 million of revenues and interest under the program during the three months ended March 31, 2014 and 2013, respectively.
Over the past year, we have increased the amount of scholarships offered to our students in an effort to improve the percentage of students who start school after applying. Because scholarships are recognized ratably over the term of the student's course or program in accordance with our revenue recognition policy, an increase in scholarships accepted does not immediately impact revenues. During the six months ended March 31, 2014, a decline in revenues of approximately $0.6 million is attributable to the increase in scholarship discounts applied for students currently attending classes.
Educational services and facilities expenses. Our educational services and facilities expenses for the three months and six months ended March 31, 2014 were $50.7 million and $101.8 million, respectively. This represents increases of $0.2 million and $1.7 million, as compared to $50.5 million and $100.1 million, respectively, for the three months and six months ended March 31, 2013, respectively.

The following table sets forth the significant components of our educational services and facilities expenses:

                                       Three Months Ended March 31,           Six Months Ended March 31,
                                         2014                 2013               2014             2013
                                                                (In thousands)
Salaries expense                   $       22,499       $       21,425     $       44,164     $    43,152
Employee benefits and tax                   4,454                4,877              8,495           8,607
Stock-based compensation                      149                   44                301             264
Bonus expense                                 (87 )                113                271             661
Compensation and related costs             27,015               26,459             53,231          52,684
Occupancy costs                             9,035                9,224             18,546          18,446
Depreciation and amortization
expense                                     4,697                4,704              9,317           9,392
Other educational services and
facilities expense                          3,636                3,883              7,554           7,814
Supplies and maintenance                    2,643                2,405              4,939           4,554
Tools and training aids expense             2,367                2,270              4,855           4,674
Contract services expense                   1,259                1,511              3,321           2,584
                                   $       50,652       $       50,456     $      101,763     $   100,148

The increase in compensation and related costs was primarily attributable to increases of approximately $1.1 million and $1.0 million in salaries expense for the three months and six months ended March 31, 2014, respectively, as compared to the same periods in the prior year. The increases were primarily due to normal salary merit increases. Additionally, we are realizing the anticipated efficiencies from the integration of the Automotive Technology and Diesel Technology II curricula at our Avondale, Arizona campus; these efficiencies, when combined with lower new students starts at this campus, resulted in severance of approximately $0.2 million at this campus. The increases were partially offset by an overall decrease in employee headcount resulting from our focus on cost control. Bonus expense for the year ending September 30, 2014 is anticipated to be lower than the prior year due to the design of the plan, which includes a reduction in the bonus plan payout levels.
Contract services expense increased $0.7 million during the six months ended March 31, 2014, as compared to the same period in the prior year. The increase was primarily attributable to an increase in contract services in support of the relocation of our Glendale Heights, Illinois campus to Lisle, Illinois as well as expenses associated with outsourcing certain financial aid processes. As discussed in footnote 7 to our condensed consolidated financial statements included in this Report on Form 10-Q, in December 2013, we recorded an asset and related financing obligation for our Lisle, Illinois campus. We anticipate the related


depreciation expense will be approximately $1.6 million for the year ending September 30, 2014. We expect this increase will be offset by a decrease in depreciation expense on other assets, as a higher percentage of our fixed assets are fully depreciated.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months and six months ended March 31, 2014 were $45.6 million and $88.5 million, respectively. This represents decreases of $1.0 million and $0.8 million, as compared to $46.6 million and $89.3 million, respectively, for the three months and six months ended March 31, 2013, respectively.

The following table sets forth the significant components of our selling, general and administrative expenses:

                                        Three Months Ended March 31,          Six Months Ended March 31,
                                          2014                 2013               2014             2013
                                                                (In thousands)
Salaries expense                    $       18,076       $       18,433     $       36,179     $   36,434
Employee benefits and tax                    3,854                4,582              7,548          8,029
Stock-based compensation                     1,614                1,516              2,805          2,741
Bonus expense                                 (408 )                268                820          1,874
Compensation and related costs              23,136               24,799             47,352         49,078
Advertising expense                         12,368               10,723             21,095         19,093
Other selling, general and
administrative expenses                      6,958                6,706             13,034         12,306
Contract services expense                    1,213                1,584              2,598          2,918
Bad debt expense                               649                1,076              1,990          2,620
Depreciation and amortization
expense                                        846                1,205              1,744          2,502
Legal services expense                         384                  465                656            784
                                    $       45,554       $       46,558     $       88,469     $   89,301

Compensation and related costs decreased approximately $1.7 million for both the three months and six months ended March 31, 2014, as compared to the same periods in the prior year. Bonus expense for the year ending September 30, 2014 is anticipated to be lower than the prior year due to the design of the plan, which includes a reduction in the bonus plan payout levels. Additionally, employee benefits and tax decreased for the three months and six months ended March 31, 2014, primarily due to a decrease in self-insurance medical claims. We are implementing significant compensation changes for our field admissions representatives effective July 1, 2014. We anticipate that the changes will result in decreased compensation expense and, in future periods, could result in turnover in field representative positions and decreased representative efficiency.
Advertising expense increased $1.7 million and $2.0 million for the three months and six months ended March 31, 2014, respectively, as compared to the same periods in the prior year. A portion of the increases were attributable to higher inquiry generation expenses; competitive pressures led to price increases and a tighter market for television and internet advertising. We are focusing on identifying the optimal balance between quality and quantity of inquiries from potential students. Advertising expense as a percentage of revenues for the three months and six months ended March 31, 2014 was approximately 13% and 11%, respectively. We anticipate our advertising expense will be in the range of 10%-11% of revenue for the year ending September 30, 2014.
Legal services expense decreased for the three months and six months ended March 31, 2014, as compared to the same period in the prior year. As discussed in Part I, Item 3 of our Annual Report on Form 10-K filed with the SEC on December 4, 2013, during the year ended September 30, 2013, we settled legal matters for which we previously incurred significant legal costs. We anticipate lower legal services expense for the year ending September 30, 2014 compared to the year ended September 30, 2013.
Income taxes. Our income tax benefit for the three months ended March 31, 2014 and 2013 was $0.3 million, or 14.7% of pre-tax loss, and $0.7 million, or 43.3% of pre-tax loss, respectively. Our provision for income taxes for the six months ended March 31, 2014 and 2013 was $1.3 million, or 89.4% of pre-tax income, and $1.9 million, or 41.9% of pre-tax income, respectively. The effective income tax rate in each period differed from the federal statutory tax rate of 35% primarily as a result of state income taxes, net of related federal income tax benefits, and an increase in tax expense related to share-based compensation.


At the time of our initial public offering in December 2003 we began awarding stock-based compensation in the form of stock options with a contractual life of . . .

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