UNIVERSAL TECHNICAL INSTITUTE INC - 10-Q Quarterly Report

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-31923

UNIVERSAL TECHNICAL INSTITUTE, INC.

(Exact name of registrant as specified in its charter)


Delaware		86-0226984
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

20410 North 19^th Avenue, Suite 200
Phoenix, Arizona 85027
(Address of principal executive offices)

(623) 445-9500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

At May 13, 2004, there were outstanding 27,710,576 shares of the registrant’s common stock.

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share amounts)


	September 30,			March 31,
	2003			2004
Assets
Current assets:
Cash and cash equivalents	$	8,925		$	33,987
Receivables, net		19,856			14,034
Prepaid expenses and other assets		3,038			5,268

Total current assets		31,819			53,289
Property and equipment, net		27,446			31,798
Goodwill		20,579			20,579
Deferred financing fees, net		1,300			416
Other assets		2,955			1,949

Total assets	$	84,099		$	108,031

Liabilities, Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses	$	25,005		$	25,166
Current portion of long-term debt and capital leases		3,860			106
Deferred revenue		25,692			29,890
Accrued tool sets		3,523			3,366
Other current liabilities		2,979			1,855

Total current liabilities		61,059			60,383
Long-term debt and capital leases		28,014			16
Mandatory redeemable preferred stock (redemption value of $25,941 at September 30, 2003)		25,462			—
Distributions payable to shareholders		71			71
Other liabilities		5,484			7,956

Total liabilities		120,090			68,426

Commitments and contingencies
Preferred stock, $.0001 par value, 10,000,000 shares authorized:
Redeemable convertible preferred stock - 2,357 shares issued and outstanding at September 30, 2003 and 0 shares issued and outstanding at March 31, 2004 (redemption value of $50,618 at September 30, 2003)		47,161			—

Shareholders’ equity (deficit):
Common stock, $.0001 par value, 100,000,000 shares authorized, 13,872,785 shares issued and outstanding at September 30, 2003 and 27,710,576 shares issued and outstanding at March 31, 2004		1			1
Paid-in capital		—			107,997
Accumulated deficit		(83,125	)		(68,393	)
Subscriptions receivable		(28	)		—

Total shareholders’ equity (deficit)		(83,152	)		39,605

Total liabilities, redeemable preferred stock and shareholders’ equity (deficit)	$	84,099		$	108,031

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2003			2004			2003			2004
Net Revenues	$	47,358		$	63,684		$	92,731		$	122,727
Operating expenses:
Educational services and facilities		21,828			28,230			42,707			53,832
Selling, general and administrative		16,049			21,960			32,302			41,387

Total operating expenses		37,877			50,190			75,009			95,219

Income from operations		9,481			13,494			17,722			27,508

Other expense (income):
Interest income		(119	)		(50	)		(238	)		(75	)
Interest expense		882			195			2,093			1,010
Other expense		—			—			—			752

Total other expense		763			145			1,855			1,687

Income before income taxes		8,718			13,349			15,867			25,821
Income tax expense		3,317			5,293			5,819			10,313

Net income		5,401			8,056			10,048			15,508
Preferred stock dividends		1,145			—			2,290			776

Net income available to common shareholders	$	4,256		$	8,056		$	7,758		$	14,732

Earnings per share:
Net income per share - basic	$	0.32		$	0.29		$	0.58		$	0.68

Net income per share - diluted	$	0.21		$	0.28		$	0.39		$	0.58

Weighted average number of common shares outstanding:
Basic		13,402			27,707			13,402			21,573

Diluted		24,952			28,452			24,936			26,695

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(In thousands)


	Common Stock				Paid-in		Accumulated			Subscriptions			Total Shareholders’
	Shares		Amount		Capital		Deficit			Receivable			Equity
Balance at September 30, 2003		13,873	$	1	$	—	$	(83,125	)	$	(28	)	$	(83,152	)
Net income								15,508						15,508
Issuance of common stock, net		3,250				59,040								59,040
Conversion of preferred stock		10,571				48,540								48,540
Proceeds received on subscription receivable											28			28
Exercise of stock options		12				53								53
Tax benefit from employee stock option plan						120								120
Stock compensation		5				244								244
Dividends on preferred stock								(776	)					(776	)

Balance at March 31, 2004		27,711	$	1	$	107,997	$	(68,393	)	$	—		$	39,605

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)


	For the Six Months Ended
	March 31,
	2003			2004
Cash flows from operating activities:
Net income	$	10,048		$	15,508
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,785			4,113
Bad debt expense		1,222			1,111
Tax benefit from option exercise		—			120
Stock compensation		—			244
Deferred income taxes		327			117
Write-off of deferred financing fees		—			752
Loss on disposal of property and equipment		79			7
Preferred stock interest expense		—			265
Changes in assets and liabilities:
Receivables		318			4,711
Prepaid expenses and other assets		(656	)		(2,049	)
Other assets		(197	)		1,077
Accounts payable and accrued expenses		788			(6	)
Deferred revenue		3,099			4,198
Other current liabilities		1,537			(1,281	)
Other liabilities		349			2,329

Net cash provided by operating activities		19,699			31,216

Cash flows from investing activities:
Purchase of property and equipment		(3,525	)		(8,019	)

Net cash used in investing activities		(3,525	)		(8,019	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs of $7,585		—			59,040
Repayment of long-term debt borrowings		(1,255	)		(31,752	)
Redemption of mandatory redeemable preferred stock		—			(12,946	)
Dividends paid		—			(12,558	)
Proceeds from exercise of stock options		—			53
Proceeds from subscriptions receivable		—			28

Net cash provided by (used in) financing activities		(1,255	)		1,865

Net increase in cash and cash equivalents		14,919			25,062
Cash and cash equivalents, beginning of period		13,554			8,925

Cash and cash equivalents, end of period	$	28,473		$	33,987

The accompanying notes are an integral part of these condensed consolidated financial statements.

UNIVERSAL TECHNICAL INSTITUTE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, expect per share amounts)

1. Nature of the Business

We are a provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians. We offer undergraduate degree, diploma and certificate programs at seven campuses and manufacturer-sponsored advanced programs at 22 dedicated training centers. We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel, collision repair, motorcycle and marine industries to understand their needs for qualified service professionals.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods have been included. Operating results for the three-month period and six-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2004. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our prospectus filed with the Securities and Exchange Commission on December 17, 2003 under Rule 424(b)(1).

The unaudited condensed consolidated financial statements include the accounts of Universal Technical Institute, Inc. (“UTI”) and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

On November 11, 2003 we approved a 4,350 to 1 stock split of our common shares to be effective immediately prior to the consummation of an initial public offering. All share and per share amounts in the financial statements have been adjusted to reflect the stock split.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

3. New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting and disclosure requirements for certain financial instruments that, under previous guidance, could be classified as equity. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Upon adoption of SFAS 150, effective July 1, 2003, we classified as a liability the redeemable preferred stock series A, series B and series C with a combined carrying value of approximately $25.5 million. Additionally, effective July 1, 2003 the dividends on these securities were included as a component of interest expense instead of preferred stock dividends in the consolidated

UNIVERSAL TECHNICAL INSTITUTE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, expect per share amounts)

statement of operations. SFAS No. 150 prohibits restatements of financial statements for periods prior to adoption, accordingly these changes were made prospectively.

The following table presents a comparison of net income as if SFAS 150 had been adopted at the beginning of the earliest period presented:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2003		2004		2003		2004
Reported net income	$	5,401	$	8,056	$	10,048	$	15,508
Less preferred stock dividend for series A, series B and series C preferred stock		292		—		584		—

Adjusted net income		5,109		8,056		9,464		15,508
Less preferred stock dividend for series D preferred stock		853		—		1,706		776

Net income available for common shareholders	$	4,256	$	8,056	$	7,758	$	14,732

4. Stock-Based Compensation

We account for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and comply with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation- Transition and Disclosure-An Amendment of SFAS No. 123,” which defines a fair value based method and addresses common stock and options given to employees as well as those given to non-employees in exchange for products and services. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123:


	Three Months Ending						Six Months Ending
	March 31,						March 31,
	2003			2004			2003			2004
Net income available to common shareholders - as reported	$	5,401		$	8,056		$	10,048		$	15,508
Add stock-based employee option compensation expense included in reported net income, net of taxes		—			16			—			32
Deduct total stock-based employee option compensation expense determined using the fair value based method, net of taxes		(37	)		(452	)		(63	)		(561	)

Net income - pro forma	$	5,364		$	7,620		$	9,985		$	14,979

Earnings per share - basic - as reported	$	0.32		$	0.29		$	0.58		$	0.68

Earnings per share - diluted - as reported	$	0.21		$	0.28		$	0.39		$	0.58

Earnings per shares - basic - pro forma	$	0.32		$	0.27		$	0.58		$	0.66

Earnings per shares - diluted - pro forma	$	0.21		$	0.26		$	0.39		$	0.56

UNIVERSAL TECHNICAL INSTITUTE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, expect per share amounts)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. On December 15, 2003, we recognized our employees and awarded options to purchase approximately 1.5 million shares of our common stock with an exercise price of $20.50 per share. The exercise price represents the stock’s estimated fair market value at that time and the offering price for our shares in an initial public offering effective December 17, 2003. The following table illustrates the assumptions used for grants made during each of the three-month period and six-month period ended March 31, 2003 and 2004:


	Three Months Ending						Six Months Ending
	March 31,						March 31,
	2003			2004			2003			2004
Expected lives	5 years			5 years			5 years			5 years
Risk-free interest rate		3.25	%		3.25	%		3.25	%		3.25	%
Dividend yield		—			—			—			—
Expected volatility		—			34.43	%		—			34.48	%

5. Earnings per Common Share

SFAS No. 128, “Earnings Per Share,” requires the dual presentation of basic and diluted earnings per share on the face of the income statement and the disclosure of the reconciliation between the numerators and denominators of basic and diluted earnings per share calculations. The following schedule presents the calculation of basic and fully diluted earnings per share:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2003		2004		2003		2004
Basic earnings per share:
Net income	$	5,401	$	8,056	$	10,048	$	15,508
Less preferred stock dividends:
Mandatory redeemable preferred stock		292		—		584		—
Redeemable convertible preferred stock		853		—		1,706		776

		1,145		—		2,290		776

Income available to common shareholders	$	4,256	$	8,056	$	7,758	$	14,732

Weighted average shares outstanding		13,402		27,707		13,402		21,573

Basic earnings per share	$	0.32	$	0.29	$	0.58	$	0.68

UNIVERSAL TECHNICAL INSTITUTE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, expect per share amounts)


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2003		2004		2003		2004
Diluted earnings per share:
Income available to common shareholders	$	4,256	$	8,056	$	7,758	$	15,508
Add redeemable convertible preferred stock dividends		853				1,706		—
Add convertible promissory note interest expense, net of taxes		86				172		—

Income available to common shareholders	$	5,195	$	8,056	$	9,636	$	15,508

Weighted average number of shares Basic shares outstanding		13,402		27,707		13,402		21,573
Dilutive effect of:
Options related to the purchase of common stock		654		745		645		497
Convertible promissory note payable		642		—		635		—
Convertible preferred stock		10,254		—		10,254		4,625


	Page
	Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets September 30, 2003 and March 31, 2004 (unaudited)		1
Condensed Consolidated Statements of Operations Three and six months ended March 31, 2003 and 2004 (unaudited)		2
Condensed Consolidated Statement of Shareholders’ Equity Six months ended March 31, 2004 (unaudited)		3
Condensed Consolidated Statements of Cash Flows Six months ended March 31, 2003 and 2004 (unaudited)		4
Notes to Condensed Consolidated Interim Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		20
Item 4. Controls and Procedures		21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 6. Exhibits and Reports on Form 8-K		22
Signature		23
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	For the Six Months Ended
	March 31,
	2003		2004
Supplemental Disclosure of Cash Flow Information:
Interest Paid	$	1,412	$	749

Preferred dividends accrued but unpaid	$	2,290	$	—

Taxes paid	$	4,361	$	9,680

Training equipment obtained in exchange for services	$	127	$	167

Exchange of preferred stock for common stock	$	—	$	48,540

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