Universal Technical Institute Inc.
) reported earnings of 8 cents per share in the second quarter of
2012, lower than 28 cents per share posted in the prior-year
quarter. Quarterly earnings were also below the Zacks Consensus
Estimate of 10 cents. Once again, lower student enrollments and
compressed margins led to the earnings miss in the quarter.
Net revenue for the quarter declined 6.9% to $106.2 million from
the prior-year quarter, due to a decline in average student
enrollment. Revenues, however, topped the Zacks Consensus Estimate
of $104 million.
Quarter in Detail
The educational institute, which provides professional
automotive, diesel, collision repair, motorcycle and marine
programs, reported that average undergraduate full-time enrollment
dropped 11.2% to 16,700 in the second quarter of 2012, falling
consistently since the last few quarters.
Student starts, also referred to as "new student growth,"
declined 5.6% year over year to 3,400. Management had forewarned of
weak second quarter starts expecting it to decline in the
high-single-digit to low-double-digit range.
The decline in enrollment is the result of macroeconomic
headwinds and continued challenges in obtaining student financing.
Universal Technical derives a significant portion of its revenues
from federal student financial aid programs, referred to as Title
IV programs, which are administered by the Department of Education.
Educational institutions are increasingly under review due to the
rise in abuse of Title IV funds.
The Department of Education has proposed that an educational
program could only qualify for Title IV funds if it helps in
achieving gainful employment, which includes the criteria of loan
repayment rate and debt-to-income ratios. Educational institutions
are now being asked to submit information relating to recruitment
procedures and the use of student grants. Changing regulatory
requirements are taking a beating on enrollment growth for most
Recently, another provider of post-secondary degree programs,
ITT Educational Services Inc.
) announced a 15.4% decline in total enrollment in the first
quarter 2012 which resulted in a top-line decline of 10.8%.
) also reported a 3.9% decline in revenues due to a 3.7% reduction
in total post-secondary enrollments across all its programs.
Apollo Group Inc.
) reported a 12.2% decline in total second-quarter enrollments at
the University of Phoenix, the company's wholly owned subsidiary,
which pulled down its total revenues by 7.5%.
Average revenue per student at Universal Technical inched up
4.7% to approximately $6,300 as the decline in student enrollment
was offset by an extra earning day and increased tuition fees in
the quarter. The company reported a 2% year-over-year fall in the
number of student applications received, which, however, reflected
a significant improvement from a decline of 4% in the first quarter
of 2012 and 8% experienced in the fourth quarter of 2011.
The number of military applications surged 19%. The number of
high school applications was flat, whereas adult applications fell
6%. The graduate employment rate was consistent with last year.
Universal Technical informed that EBITDA in the quarter tumbled
94.7% to $9.4 million. Operating income plunged to $2.9 million
from $11.4 million in the year-ago period, whereas operating margin
shriveled 730 basis points to 2.7%. The fall in operating income
was due to lower top-line growth, high fixed costs and a rise in
The company is ramping up its advertising activities under brand
revitalization initiatives. Advertising expense climbed 33.5% to
$11.7 million in the quarter, and now represents 11% of total
revenue, up from 7.7% in the second quarter of fiscal 2011.
Management expects advertising expense to range between 10%-11% of
total revenue for fiscal 2012.
Management did not make any major changes to its fiscal 2012
outlook provided in the prior quarter. The rate of decline in
applications and new student starts improved in both the quarters
of the first half of 2012. Thus the company expects new student
starts to improve in the second half of the year with starts in the
third quarter being lower than those in the fourth quarter.
Management, however, continues to warn that the average number
of students for fiscal 2012 will drop at a low-teens rate than 2011
levels, and will consequently result in a mid-to-high single-digit
revenue decline. Subsequently, operating margin and net income are
also expected to be down in fiscal 2012 from 2011 levels.
Moreover, the company expects net income in the third quarter to
be lower than the second (due to seasonality) and thereafter
improve in the fourth quarter.
The company is pushing hard to manage costs effectively, amidst
macro weakness and regulatory pressures, to counter the sluggish
student enrollment environment. It is also honing its marketing
efficiency and launching new curriculum.
Universal Technical's leading position in providing technical
education to aspiring automotive professionals and its business
model of working closely with leading original equipment
manufacturers provide the company with a competitive advantage.
Universal Technical further intends to make its loan programs
more accessible to students and enhance the count of need-based
scholarships in fiscal 2012.
Other Financial Details
Universal Technical boasted of a debt-free balance sheet, and
ended the quarter with cash and cash equivalents of $116.9 million
versus $51.1 million at the end of the first quarter of 2012.
The company generated operating cash flow of $10.0 million
during the quarter versus $5.6 million in the sequentially prior
quarter. In the quarter, the company repurchased 0.125 million
shares for a total cost of approximately $1.6 million.
We currently have a Neutral recommendation on Universal
Technical Institute. The stock carries a Zacks #4 Rank in the near
term (Sell rating).
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