UNIVERSAL TECHNICAL INSTITUTE INC - 10-Q Quarterly Report

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005


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

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 þ 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 þ

At May 3, 2005, there were outstanding 27,925,170 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,
	2004			2005
Assets
Current assets:
Cash and cash equivalents	$	42,602		$	46,836
Restricted cash		10,395			200
Restricted investments		—			16,123
Receivables, net		20,124			19,330
Deferred tax asset		785			563
Prepaid expenses and other assets		3,222			5,514

Total current assets		77,128			88,566
Property and equipment, net		36,925			54,562
Investment in land		71			71
Goodwill		20,579			20,579
Deferred financing fees, net		—			13
Other assets		1,613			1,645

Total assets	$	136,316		$	165,436

Liabilities, Preferred Stock and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	32,816		$	36,931
Current portion of long-term debt and capital leases		37			10
Deferred revenue		34,523			35,644
Accrued tool sets		2,852			3,267
Other current liabilities		288			1,168

Total current liabilities		70,516			77,020
Long-term debt and capital leases		6			3
Distributions payable to shareholders		71			71
Deferred tax liability		3,054			2,862
Other liabilities		7,644			8,019

Total liabilities		81,291			87,975

Commitments and contingencies
Preferred stock, $.0001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding		—			—
Shareholders’ equity:
Common stock, $.0001 par value, 100,000,000 shares authorized, 27,781,068 shares issued and outstanding at September 30, 2004 and 27,923,289 shares issued and outstanding at March 31, 2005		1			1
Paid-in capital		110,105			113,558
Accumulated deficit		(55,081	)		(36,098	)

Total shareholders’ equity		55,025			77,461

Total liabilities, redeemable preferred stock and shareholders’ equity	$	136,316		$	165,436

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

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


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2004			2005			2004			2005
Net Revenues	$	63,684		$	77,482		$	122,727		$	150,818
Operating expenses:
Educational services and facilities		28,230			34,958			53,832			68,311
Selling, general and administrative		21,960			28,095			41,387			52,602

Total operating expenses		50,190			63,053			95,219			120,913

Income from operations		13,494			14,429			27,508			29,905

Other expense (income):
Interest income		(50	)		(332	)		(75	)		(590	)
Interest expense		195			16			1,010			57
Other expense		—			—			752			—

Total other expense (income)		145			(316	)		1,687			(533	)

Income before income taxes		13,349			14,745			25,821			30,438
Income tax expense		5,293			5,590			10,313			11,455

Net income		8,056			9,155			15,508			18,983
Preferred stock dividends		—			—			776			—

Net income available to common shareholders	$	8,056		$	9,155		$	14,732		$	18,983

Earnings per share:
Net income per share — basic	$	0.29		$	0.33		$	0.68		$	0.68

Net income per share — diluted	$	0.28		$	0.32		$	0.58		$	0.67

Weighted average number of common shares outstanding:
Basic		27,707			27,894			21,573			27,845

Diluted		28,452			28,566			26,695			28,523

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

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


	For the Six Months Ended
	March 31,
	2004			2005
Cash flows from operating activities:
Net income	$	15,508		$	18,983
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,113			4,565
Bad debt expense		1,111			1,918
Tax benefit from option exercise		120			951
Stock option compensation		244			257
Deferred income taxes		117			29
Write-off of deferred finance fees		752			—
Loss on disposal of property and equipment		7			57
Preferred stock interest expense		265			—
Changes in assets and liabilities:
Restricted cash		—			10,195
Receivables		4,711			(1,124	)
Prepaid expenses and other assets		(2,049	)		(2,291	)
Other assets		1,077			(38	)
Accounts payable and accrued expenses		(6	)		(1,284	)
Deferred revenue		4,198			1,121
Other current liabilities		(1,281	)		1,295
Other liabilities		2,329			185

Net cash provided by operating activities		31,216			34,819

Cash flows from investing activities:
Purchase of securities with intent to hold to maturity		—			(15,989	)
Purchase of property and equipment		(8,019	)		(22,106	)

Net cash used in investing activities		(8,019	)		(38,095	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs of $7,585 for the six months ended March 31, 2004		59,040			789
Repayment of long-term debt borrowings		(31,752	)		(30	)
Redemption of mandatory redeemable preferred stock		(12,946	)		—
Dividends paid		(12,558	)		—
Bank overdrafts		—			5,309
Proceeds from exercise of stock options		53			1,456
Proceeds from subscriptions receivable		28			—
Payment of deferred finance fees		—			(14	)

Net cash provided by financing activities		1,865			7,510

Net increase in cash and cash equivalents		25,062			4,234
Cash and cash equivalents, beginning of period		8,925			42,602

Cash and cash equivalents, end of period	$	33,987		$	46,836

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

UNIVERSAL TECHNICAL INSTITUTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except 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 eight 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 months and six months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2005. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2004.

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.

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 December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123(R), “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 123(R); eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement No. 123 as originally issued. After a phase-in period for Statement No. 123(R), pro forma disclosure will no longer be allowed. In the first quarter of 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 which provided further clarification on the implementation of SFAS No. 123(R).

SFAS No. 123(R) requires the measurement and recording of the cost of employee services received in exchange for awards of equity instruments to be based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123(R) was to be effective for the first interim reporting period beginning on or after June 15, 2005;

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

however, the Securities and Exchange Commission announced in April 2005 that it was extending the date for compliance with SFAS 123(R), such that SFAS No. 123(R) is effective starting with the first interim reporting period of our first fiscal year beginning on or after June 15, 2005. The first interim period of our first fiscal year beginning on or after June 15, 2005 will be the quarter ending December 31, 2005. We estimate the effect of adopting SFAS No. 123(R), based upon outstanding equity awards as of March 31, 2005, will be approximately $4.6 million for our 2006 fiscal year (which begins October 1, 2005.) This estimate does not include the impact of additional equity awards which may be granted or forfeitures which may occur subsequent to March 31, 2005 and prior to our adoption of SFAS No. 123(R).

In April 2005, FASB issued Financial Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 provides clarification of the manner in which uncertainties concerning the timing and method of settlement of an asset retirement obligation should be accounted for and when the fair value of an asset retirement obligation is deemed to be estimable on a reasonable basis. FIN 47 is effective for fiscal years ending no later than December 15, 2005. We believe our adoption of FIN 47 will not have a material impact on our consolidated financial statements or disclosures.

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 awarded to employees as well as those awarded to non-employees in exchange for products and services. SFAS No. 123 and its amendments and APB Opinion No. 25 have been superseded by SFAS No. 123(R), which is discussed in footnote 3 and which is currently scheduled to be effective beginning with our fiscal quarter ending December 31, 2005. 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:

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


	Three Months Ending						Six Months Ending
	March 31,						March 31,
	2004			2005			2004			2005
Net income available to common shareholders — as reported	$	8,056		$	9,155		$	15,508		$	18,983
Add stock-based compensation expense included in reported net income, net of taxes		16			8			32			16
Deduct total stock-based employee compensation expense determined using the fair value based method, net of taxes		(452	)		(525	)		(561	)		(1,002	)


Net income — pro forma	$	7,620		$	8,638		$	14,979		$	17,997


Earnings per share — basic — as reported	$	0.29		$	0.33		$	0.68		$	0.68

Earnings per share — diluted — as reported	$	0.28		$	0.32		$	0.58		$	0.67


Earnings per share — basic — pro forma	$	0.27		$	0.31		$	0.66		$	0.64

Earnings per share — diluted — pro forma	$	0.26		$	0.30		$	0.56		$	0.64

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following table illustrates the assumptions used for grants made during each of the three months and six months ended March 31, 2004 and 2005:


	Three Months Ending						Six Months Ending
	March 31,						March 31,
	2004			2005			2004			2005
Expected lives	5 years			5 years			5 years			5 years
Risk-free interest rate		3.25	%		3.76	%		3.25	%		3.76	%
Dividend yield		—			—			—			—
Expected volatility		34.43	%		34.51	%		34.48	%		34.51	%

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:

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


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2004		2005		2004		2005
Basic earnings per share:
Net income	$	8,056	$	9,155	$	15,508	$	18,983
Less redeemable convertible preferred stock dividends		—		—		776		—

Income available to common shareholders	$	8,056	$	9,155	$	14,732	$	18,983


Weighted average shares outstanding		27,707		27,894		21,573		27,845

Basic earnings per share	$	0.29	$	0.33	$	0.68	$	0.68


Diluted earnings per share:
Income available to common shareholders	$	8,056	$	9,155	$	14,732	$	18,983
Add redeemable convertible preferred stock dividends		—		—		776		—

Income available to common shareholders	$	8,056	$	9,155	$	15,508	$	18,983


Weighted average number of shares
Basic shares outstanding		27,707		27,894		21,573		27,845
Dilutive effect of:
Options related to the purchase of common stock		745		672		497		678
Convertible preferred stock		—		—		4,625		—

Diluted shares outstanding		28,452		28,566		26,695		28,523


Diluted earnings per share	$	0.28	$	0.32	$	0.58	$	0.67
	&


	UNIVERSAL TECHNICAL INSTITUTE, INC.
	INDEX TO FORM 10-Q
	FOR THE QUARTER ENDING MARCH 31, 2005
		Page
PART I.	FINANCIAL INFORMATION	Number


Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at September 30, 2004 and March 31, 2005 (unaudited)	1

	Condensed Consolidated Income Statements for the three months and six months ended March 31, 2004 and 2005 (unaudited)	2

	Condensed Consolidated Statement of Shareholders’ Equity for the six months ended March 31, 2005 (unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2004 and 2005 (unaudited)	4

	Notes to Condensed Consolidated Interim Financial Statements (unaudited)	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	21

Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 6.	Exhibits	24
EXHIBIT 31.1
EXHIBIT
EXHIBIT 32.1
EXHIBIT 32.2


	For the Six Months Ended
	March 31,
	2004		2005
Supplemental Disclosure of Cash Flow Information:
Interest Paid	$	749	$	48

Taxes paid	$	9,680	$	9,881

Training equipment obtained in exchange for services	$	167	$	307

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

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										Total
	Common Stock				Paid-in		Accumulated			Shareholders’
	Shares		Amount		Capital		Deficit			Equity
Balance at September 30, 2004		27,781	$	1	$	110,105	$	(55,081	)	$	55,025
Net income		—		—		—		18,983			18,983
Issuance of common stock under employee plans		136		—		2,245		—			2,245
Tax benefit from employee stock plans		—		—		951		—			951
Stock compensation		6		—		257		—			257

Balance at March 31, 2005		27,923	$	1	$	113,558	$	(36,098	)	$	77,461