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UTI Incurs Loss; Misses Estimates

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Universal Technical Institute, Inc’s (UTI - Free Report) second-quarter fiscal 2013 adjusted loss of 4 cents per share largely missed the Zacks Consensus Estimate of earnings of 2 cents and the prior-year earnings of 8 cents. Once again, weak revenues and high fixed costs hurt earnings in the quarter.

Net revenue for the quarter declined 10.5% to $95.1 million from the prior-year quarter due to a decline in enrollments. Revenues also missed the Zacks Consensus Estimate of $98.0 million. Revenues excluded $5.2 million related to unrecognized proprietary student loans, up from $3.7 million last year.

Quarter in Detail

The mechanical training institute reported a 10.2% decline in average undergraduate full-time enrollment to 15,000 in the second quarter. New student starts also declined more than 15% to 2,900 due to a 60 basis point shortfall in show rate.

Enrollment has been trending down consistently over the past few quarters as a result of persistent macroeconomic headwinds; sluggish demand due to reluctance in taking on debt and continued challenges in obtaining student financing; changing regulatory requirements; and increased competition. Moreover, the company is finding it difficult to convert its high volume of enquiries into new student starts.

Applications continue to remain under pressure as total new applications declined 9% in the quarter. Decline in applications from high school students (4%) and adults (17%) offset the 14% growth in military applications. Revenue per student was flat in the quarter.

Though management saw some positive application trends in the month of April, it expects the challenges to continue for the rest of 2013 as well.

Universal Technical’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in the quarter declined 55.8% to $4.2 million. In the quarter the company reported an operating loss of $1.9 million against an operating income of $3 million in the prior year quarter. Despite the decrease in advertising and compensation expenses, operating income declined due to lower top line growth and high fixed costs. Advertising expenses declined close to 8% in the quarter as the company is trying to lower as well as better align its marketing investments.

Initiatives to Improve

In order to improve student population and market share, Universal Technical is shifting focus from its prior marketing strategy of generating higher volume of student inquiry to improving the number of new student starts. The company hopes to improve its new student starts at a lower cost by simplifying work and reducing waste, while at the same time attracting students who are likely to have a successful career at Universal Technical.

It is also modifying programs according to the needs of the employers, thus providing relevant training that leads to quality student outcomes, thereby offering more value. Universal Technical is also making its loan programs more accessible to students and also easing some eligibility restrictions. Alongside, Universal Technical is working toward controlling costs to better align it with lower enrollments.

However, these efforts will take time to show effective results, which combined with worsening market environment and the difficulty in converting enquiries to enrollments is taking a toll on new student starts.

Other Financial Details

Universal Technical ended the second quarter with cash and cash equivalents of $94.3 million better than $89.3 million at the end of first quarter. In the quarter, the company paid a dividend of 10 cents per share but did not re-purchase any shares.

2013 Outlook Retained

The company retained its previously provided revenue guidance. It expects revenues to dip in the high single-digits in 2013 as new student starts will decline in mid-to-high single digits. The company expects new student starts to decline in the third quarter due to poor show rates. New student starts could possibly show some improvement in the fourth quarter. Moreover, Universal Technical expects overall contraction in the operating margin and lower net income from the prior-year levels despite significantly lower costs expected in the second half.

Universal Technical provides professional automotive, diesel, collision repair, motorcycle and marine programs. The company works closely with leading original equipment manufacturers (OEM) in the automotive, diesel, motorcycle and marine industries such as, Ford Motor Co. (F - Free Report) , Honda Motor Co., Ltd. (HMC - Free Report) , Harley Davidson, Inc. (HOG - Free Report) and many more. Universal Technical carries a Zacks Rank #4 (Sell).

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