UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20202021
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
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 incorporation or organization) | | | (IRS Employer Identification No.) | |
16220 North Scottsdale Road,4225 East Windrose Drive, Suite 500200
Scottsdale,Phoenix, Arizona 8525485032
(Address of principal executive offices, including zip code)
(623) 445-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.0001 par value | UTI | New York Stock Exchange |
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 ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | |
Large accelerated filer ¨ | Accelerated filer þ |
Non-accelerated filer ¨ | Smaller reporting company ☐ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
At April 30, 2020,May 3, 2021, there were 32,605,13532,813,845 shares outstanding of the registrant's common stock.
UNIVERSAL TECHNICAL INSTITUTE, INC.
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2020
2021
Special Note Regarding Forward-Looking StatementsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q containsand the documents incorporated by reference herein contain forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (“Securities Act”), which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation and availability of resources.resources and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. From time to time, we also provide forward-looking statements in other materials we release to the public as well as verbal forward-looking statements. These
In some cases, you can identify forward-looking statements include, without limitation, statements regarding: proposed new programs; scheduled openings of new campuses and campus expansions; expectations that regulatory developments or agency interpretations of such regulatory developments or other matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity and anticipated timing for ongoing regulatory initiatives; statements concerning projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s goals and objectives and other similar expressions. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. Wordsby terms such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,“plans,” “future,” “intends,” “plans,“anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions as well as statements in future tense,(including the negative form of such expressions) intended to identify forward-looking statements. However,statements, although not all forward-lookingforward looking statements contain these identifying words. Forward-looking statements are based on our current expectations and assumptions, do not strictly relate to historical or current facts, any of which may not prove to be accurate. Many factors could cause actual results to differ materially and adversely from these forward-looking statements. Important factors that could cause actual results to differ from those in our forward-looking statements include, without limitation:
•failure of our schools to comply with the extensive regulatory requirements for school operations;
•our failure to maintain eligibility for federal student financial assistance funds;
•continued Congressional examination of the for-profit education sector;
•a disruption in our ability to process student loans under the Federal Direct Loan Program;
•regulatory investigations of, or actions commenced against, us or other companies in our industry;
•the effect of public health pandemics, epidemics or outbreak, including COVID-19;
•changes in the state regulatory environment or budgetary constraints;
•our failure to improve underutilized capacity at certain of our campuses;
•enrollment declines or challenges in our students’ ability to find employment as a result of macroeconomic conditions;
•our failure to maintain and expand existing industry relationships and develop new industry relationships with our industry customers;
•our ability to update and expand the content of existing programs and develop and integrate new programs in a cost-effective manner and on a timely basis;
•our failure to effectively identify, establish and operate additional schools, programs or campuses;
•the effect of our principal stockholder owning a significant percentage of our capital stock, and thus being able to influence certain corporate matters and the potential in the future to gain substantial control over our company;
•the impact of certain holders of our Series A Preferred Stock owning a significant percentage of our capital stock, their ability to influence and control certain corporate matters and the potential for future dilution to holders of our common stock;
•loss of our senior management or other key employees; and
The factors above are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions.realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Many events beyond our control may determine whether results we anticipate will be achieved. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. Among the factors that could cause actual results to differ materially are the factors discussed under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should bear this in mind as you consider forward-looking statements.
Also, these forward-looking statements represent our estimates and assumptions only as of the date of the document containing the applicable statement. Except as required by law, we undertake no obligation to publicly update forward-lookingor revise forward looking statements, whether as a result of new information, future events or otherwise. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q, including the documents that we incorporate by reference herein, by these cautionary statements. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-Kreports and 10-K reports tofilings with the Securities and Exchange Commission (“SEC”). The
Annual Report on Form 10-K that we filed with the SEC on December 6, 2019 listed various important factors that could cause actual results to differ materially from expected and historical results. We note these factors for investors within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. Readers can find them under the heading “Risk Factors” in the Report on Form 10-K and in this Report on Form 10-Q, and investors should refer to them. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. Our filings with the SEC may be accessed at the SEC’s web site at www.sec.gov.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and per share amounts)
(Unaudited)
| | | March 31, 2020 | | September 30, 2019 | | March 31, 2021 | | September 30, 2020 |
Assets | Assets | | | | | Assets | | | | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 76,606 | | | $ | 65,442 | | Cash and cash equivalents | | $ | 58,965 | | | $ | 76,803 | |
Restricted cash | Restricted cash | | 14,235 | | | 15,113 | | Restricted cash | | 12,817 | | | 12,116 | |
Held-to-maturity investments | Held-to-maturity investments | | 41,510 | | | — | | Held-to-maturity investments | | 19,502 | | | 38,055 | |
Receivables, net | Receivables, net | | 23,771 | | | 17,937 | | Receivables, net | | 19,809 | | | 35,411 | |
Notes receivable, current portion | Notes receivable, current portion | | 5,105 | | | 5,227 | | Notes receivable, current portion | | 5,307 | | | 5,184 | |
Prepaid expenses | Prepaid expenses | | 7,126 | | | 7,054 | | Prepaid expenses | | 8,262 | | | 6,121 | |
Other current assets | Other current assets | | 6,906 | | | 7,331 | | Other current assets | | 6,431 | | | 6,489 | |
Total current assets | Total current assets | | 175,259 | | | 118,104 | | Total current assets | | 131,093 | | | 180,179 | |
Property and equipment, net | Property and equipment, net | | 74,024 | | | 104,126 | | Property and equipment, net | | 114,921 | | | 72,743 | |
Goodwill | Goodwill | | 8,222 | | | 8,222 | | Goodwill | | 8,222 | | | 8,222 | |
Notes receivable, less current portion | Notes receivable, less current portion | | 29,322 | | | 29,852 | | Notes receivable, less current portion | | 28,996 | | | 27,609 | |
Right-of-use assets for operating leases | Right-of-use assets for operating leases | | 136,784 | | | — | | Right-of-use assets for operating leases | | 147,651 | | | 144,663 | |
Other assets | Other assets | | 9,516 | | | 10,222 | | Other assets | | 9,462 | | | 8,565 | |
Total assets | Total assets | | $ | 433,127 | | | $ | 270,526 | | Total assets | | $ | 440,345 | | | $ | 441,981 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | | $ | 49,121 | | | $ | 45,878 | | Accounts payable and accrued expenses | | $ | 49,088 | | | $ | 51,891 | |
| Deferred revenue | Deferred revenue | | 36,754 | | | 42,886 | | Deferred revenue | | 40,954 | | | 40,694 | |
Accrued tool sets | Accrued tool sets | | 2,942 | | | 2,586 | | Accrued tool sets | | 3,251 | | | 3,148 | |
Operating lease liability, current portion | Operating lease liability, current portion | | 25,453 | | | — | | Operating lease liability, current portion | | 19,565 | | | 23,666 | |
Financing obligation, current portion | | — | | | 1,554 | | |
| Other current liabilities | Other current liabilities | | 1,341 | | | 3,940 | | Other current liabilities | | 1,901 | | | 2,241 | |
Total current liabilities | Total current liabilities | | 115,611 | | | 96,844 | | Total current liabilities | | 114,759 | | | 121,640 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 674 | | | 329 | | Deferred tax liabilities, net | | 674 | | | 674 | |
Deferred rent liability | | — | | | 10,326 | | |
Financing obligation | | — | | | 39,161 | | |
| Operating lease liability | Operating lease liability | | 124,873 | | | — | | Operating lease liability | | 140,136 | | | 134,089 | |
Other liabilities | Other liabilities | | 6,913 | | | 9,578 | | Other liabilities | | 8,318 | | | 9,056 | |
Total liabilities | Total liabilities | | 248,071 | | | 156,238 | | Total liabilities | | 263,887 | | | 265,459 | |
Commitments and contingencies (Note 14) | | | | | |
Commitments and contingencies (Note 13) | | Commitments and contingencies (Note 13) | | 0 | | 0 |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | |
Common stock, $0.0001 par value, 100,000 shares authorized, 32,687 and 32,499 shares issued | | 3 | | | 3 | | |
Common stock, $0.0001 par value, 100,000 shares authorized, 32,896 and 32,730 shares issued | | Common stock, $0.0001 par value, 100,000 shares authorized, 32,896 and 32,730 shares issued | | 3 | | | 3 | |
Preferred stock, $0.0001 par value, 10,000 shares authorized; 700 shares of Series A Convertible Preferred Stock issued and outstanding, liquidation preference of $100 per share | Preferred stock, $0.0001 par value, 10,000 shares authorized; 700 shares of Series A Convertible Preferred Stock issued and outstanding, liquidation preference of $100 per share | | — | | | — | | Preferred stock, $0.0001 par value, 10,000 shares authorized; 700 shares of Series A Convertible Preferred Stock issued and outstanding, liquidation preference of $100 per share | | 0 | | | 0 | |
Paid-in capital - common | Paid-in capital - common | | 140,086 | | | 187,493 | | Paid-in capital - common | | 142,383 | | | 141,002 | |
Paid-in capital - preferred | Paid-in capital - preferred | | 68,853 | | | 68,853 | | Paid-in capital - preferred | | 68,853 | | | 68,853 | |
Treasury stock, at cost, 82 and 6,865 shares | | (365) | | | (97,388) | | |
Treasury stock, at cost, 82 shares as of March 31, 2021 and September 30, 2020 | | Treasury stock, at cost, 82 shares as of March 31, 2021 and September 30, 2020 | | (365) | | | (365) | |
Retained deficit | Retained deficit | | (23,521) | | | (44,673) | | Retained deficit | | (34,416) | | | (32,971) | |
Total shareholders’ equity | Total shareholders’ equity | | 185,056 | | | 114,288 | | Total shareholders’ equity | | 176,458 | | | 176,522 | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 433,127 | | | $ | 270,526 | | Total liabilities and shareholders’ equity | | $ | 440,345 | | | $ | 441,981 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | March 31, | | | March 31, | | | March 31, | | March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Revenues | Revenues | $ | 82,717 | | | $ | 81,746 | | | $ | 169,951 | | | $ | 164,796 | | Revenues | $ | 77,709 | | | $ | 82,717 | | | $ | 153,834 | | | $ | 169,951 | |
Operating expenses: | Operating expenses: | | | | | | | | Operating expenses: | |
Educational services and facilities | Educational services and facilities | 42,909 | | | 45,822 | | | 85,785 | | | 91,557 | | Educational services and facilities | 40,480 | | | 42,909 | | | 79,811 | | | 85,785 | |
Selling, general and administrative | Selling, general and administrative | 40,307 | | | 41,504 | | | 80,411 | | | 86,024 | | Selling, general and administrative | 38,890 | | | 40,307 | | | 74,909 | | | 80,411 | |
Total operating expenses | Total operating expenses | 83,216 | | | 87,326 | | | 166,196 | | | 177,581 | | Total operating expenses | 79,370 | | | 83,216 | | | 154,720 | | | 166,196 | |
(Loss) income from operations | (Loss) income from operations | (499) | | | (5,580) | | | 3,755 | | | (12,785) | | (Loss) income from operations | (1,661) | | | (499) | | | (886) | | | 3,755 | |
Other (expense) income: | | | | | | | | |
Other income (expense): | | Other income (expense): | |
Interest income | Interest income | 347 | | | 392 | | | 683 | | | 795 | | Interest income | 8 | | | 347 | | | 62 | | | 683 | |
Interest expense | Interest expense | (3) | | | (808) | | | (3) | | | (1,622) | | Interest expense | (1) | | | (3) | | | (3) | | | (3) | |
Equity in earnings of unconsolidated affiliate | — | | | 101 | | | — | | | 198 | | |
Other (expense) income, net | (507) | | | 721 | | | (329) | | | 656 | | |
Total other (expense) income, net | (163) | | | 406 | | | 351 | | | 27 | | |
| Other income (expense), net | | Other income (expense), net | 73 | | | (507) | | | 355 | | | (329) | |
Total other income (expense), net | | Total other income (expense), net | 80 | | | (163) | | | 414 | | | 351 | |
(Loss) income before income taxes | (Loss) income before income taxes | (662) | | | (5,174) | | | 4,106 | | | (12,758) | | (Loss) income before income taxes | (1,581) | | | (662) | | | (472) | | | 4,106 | |
Income tax benefit (expense) | 10,804 | | | (89) | | | 10,720 | | | (222) | | |
Net income (loss) | $ | 10,142 | | | $ | (5,263) | | | $ | 14,826 | | | $ | (12,980) | | |
Income tax benefit | | Income tax benefit | 34 | | | 10,804 | | | 8 | | | 10,720 | |
Net (loss) income | | Net (loss) income | $ | (1,547) | | | $ | 10,142 | | | $ | (464) | | | $ | 14,826 | |
Preferred stock dividends | Preferred stock dividends | 1,309 | | | 1,295 | | | 2,632 | | | 2,618 | | Preferred stock dividends | 1,312 | | | 1,309 | | | 2,625 | | | 2,632 | |
Income (loss) available for distribution | $ | 8,833 | | | $ | (6,558) | | | $ | 12,194 | | | $ | (15,598) | | |
Net (loss) income available for distribution | | Net (loss) income available for distribution | $ | (2,859) | | | $ | 8,833 | | | $ | (3,089) | | | $ | 12,194 | |
| | | | | | | | | | | | | | | | |
Earnings per share (See Note 16): | | | | | | | | |
Net income (loss) per share - basic | $ | 0.18 | | | $ | (0.26) | | | $ | 0.25 | | | $ | (0.61) | | |
Net income (loss) per share - diluted | $ | 0.18 | | | $ | (0.26) | | | $ | 0.25 | | | $ | (0.61) | | |
Earnings per share (See Note 15 ): | | Earnings per share (See Note 15 ): | |
Net (loss) income per share - basic | | Net (loss) income per share - basic | $ | (0.09) | | | $ | 0.18 | | | $ | (0.09) | | | $ | 0.25 | |
Net (loss) income per share - diluted | | Net (loss) income per share - diluted | $ | (0.09) | | | $ | 0.18 | | | $ | (0.09) | | | $ | 0.25 | |
| Weighted average number of shares outstanding: | Weighted average number of shares outstanding: | | | | | | | | Weighted average number of shares outstanding: | |
Basic | Basic | 28,379 | | | 25,412 | | | 27,013 | | | 25,366 | | Basic | 32,762 | | | 28,379 | | | 32,709 | | | 27,013 | |
Diluted | Diluted | 49,665 | | | 25,412 | | | 48,341 | | | 25,366 | | Diluted | 32,762 | | | 28,644 | | | 32,709 | | | 27,320 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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| | Common Stock | | Preferred Stock | | Paid-in Capital - Common | | Paid-in Capital - Preferred | | Treasury Stock | | Retained Deficit | | | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | |
Balance as of September 30, 2020 | | 32,730 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 141,002 | | | $ | 68,853 | | | (82) | | | $ | (365) | | | $ | (32,971) | | | | | $ | 176,522 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,083 | | | | | 1,083 | |
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Cumulative effect from adoption of ASC 326 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,644 | | | | | 1,644 | |
Issuance of common stock under employee plans | | 66 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (29) | | | — | | | — | | | — | | | (178) | | | — | | | — | | | — | | | — | | | | | (178) | |
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Stock-based compensation | | — | | | — | | | — | | | — | | | 548 | | | — | | | — | | | — | | | — | | | | | 548 | |
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| | | | | | | | | | | | | | | | | | | | | | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,313) | | | | | (1,313) | |
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Balance as of December 31, 2020 | | 32,767 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 141,372 | | | $ | 68,853 | | | (82) | | | $ | (365) | | | $ | (31,557) | | | | | $ | 178,306 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,547) | | | | | (1,547) | |
Issuance of common stock under employee plans | | 164 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (35) | | | — | | | — | | | — | | | (223) | | | — | | | — | | | — | | | — | | | | | (223) | |
| | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 1,234 | | | — | | | — | | | — | | | — | | | | | 1,234 | |
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Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,312) | | | | | (1,312) | |
Balance as of March 31, 2021 | | 32,896 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 142,383 | | | $ | 68,853 | | | (82) | | | $ | (365) | | | $ | (34,416) | | | | | $ | 176,458 | |
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| | Common Stock | | | | Preferred Stock | | | | Paid-in Capital - Common | | Paid-in Capital - Preferred | | Treasury Stock | | | | Retained Deficit | | | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | Shares | | Amount | | | | | | |
Balance as of September 30, 2019 | | 32,499 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 187,493 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (44,673) | | | | | $ | 114,288 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,684 | | | | | 4,684 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect from adoption of ASC 842 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,107 | | | | | 9,107 | |
Issuance of common stock under employee plans | | 179 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (68) | | | — | | | — | | | — | | | (497) | | | — | | | — | | | — | | | — | | | | | (497) | |
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Stock-based compensation | | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | — | | | — | | | | | 14 | |
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Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,323) | | | | | (1,323) | |
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Balance as of December 31, 2019 | | 32,610 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 187,010 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (32,205) | | | | | $ | 126,273 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,142 | | | | | 10,142 | |
Adjustment for the adoption of ASC 842 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (149) | | | | | (149) | |
Issuance of common stock under employee plans | | 81 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (4) | | | — | | | — | | | — | | | (30) | | | — | | | — | | | — | | | — | | | | | (30) | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 992 | | | — | | | — | | | — | | | — | | | | | 992 | |
Shares issued for equity offering | | — | | | — | | | — | | | — | | | (47,886) | | | — | | | 6,783 | | | 97,023 | | | — | | | | | 49,137 | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,309) | | | | | (1,309) | |
Balance as of March 31, 2020 | | 32,687 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 140,086 | | | $ | 68,853 | | | (82) | | | $ | (365) | | | $ | (23,521) | | | | | $ | 185,056 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Preferred Stock | | Paid-in Capital - Common | | Paid-in Capital - Preferred | | Treasury Stock | | Retained Deficit | | | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | |
Balance as of September 30, 2019 | | 32,499 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 187,493 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (44,673) | | | | | $ | 114,288 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,684 | | | | | 4,684 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect from adoption of ASC 842 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9,107 | | | | | 9,107 | |
Issuance of common stock under employee plans | | 179 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (68) | | | — | | | — | | | — | | | (497) | | | — | | | — | | | — | | | — | | | | | (497) | |
| | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | — | | | — | | | | | 14 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,323) | | | | | (1,323) | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2019 | | 32,610 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 187,010 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (32,205) | | | | | $ | 126,273 | |
Net income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 10,142 | | | | | 10,142 | |
Adjustment for the adoption of ASC 842 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (149) | | | | | (149) | |
Issuance of common stock under employee plans | | 81 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (4) | | | — | | | — | | | — | | | (30) | | | — | | | — | | | — | | | — | | | | | (30) | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 992 | | | — | | | — | | | — | | | — | | | | | 992 | |
Shares issued for equity offering | | — | | | — | | | — | | | — | | | (47,886) | | | — | | | 6,783 | | | 97,023 | | | — | | | | | 49,137 | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,309) | | | | | (1,309) | |
Balance as of March 31, 2020 | | 32,687 | | | $ | 3 | | | 700 | | | $ | 0 | | | $ | 140,086 | | | $ | 68,853 | | | (82) | | | $ | (365) | | | $ | (23,521) | | | | | $ | 185,056 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY - (CONTINUED)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Preferred Stock | | | | Paid-in Capital - Common | | Paid-in Capital - Preferred | | Treasury Stock | | | | Retained Deficit | | | | Total Shareholders’ Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | Shares | | Amount | | | | | | |
Balance as of September 30, 2018 | | 32,169 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 186,732 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (31,555) | | | | | $ | 126,645 | |
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Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7,717) | | | | | (7,717) | |
Issuance of common stock under employee plans | | 99 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (38) | | | — | | | — | | | — | | | (118) | | | — | | | — | | | — | | | — | | | | | (118) | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 694 | | | — | | | — | | | — | | | — | | | | | 694 | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,323) | | | | | (1,323) | |
Balance as of December 31, 2018 | | 32,230 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 187,308 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (40,595) | | | | | $ | 118,181 | |
Net loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5,263) | | | | | (5,263) | |
Issuance of common stock under employee plans | | 134 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | — | |
Shares withheld for payroll taxes | | (2) | | | — | | | — | | | — | | | (7) | | | — | | | — | | | — | | | — | | | | | (7) | |
Stock-based compensation | | — | | | — | | | — | | | — | | | 618 | | | — | | | — | | | — | | | — | | | | | 618 | |
Preferred stock dividends | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,295) | | | | | (1,295) | |
Balance as of March 31, 2019 | | 32,362 | | | $ | 3 | | | 700 | | | $ | — | | | $ | 187,919 | | | $ | 68,853 | | | (6,865) | | | $ | (97,388) | | | $ | (47,153) | | | | | $ | 112,234 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | Six Months Ended March 31, | | | Six Months Ended March 31, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | |
Net income (loss) | | $ | 14,826 | | | $ | (12,980) | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
Net (loss) income | | Net (loss) income | $ | (464) | | | $ | 14,826 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 5,894 | | | 6,614 | | Depreciation and amortization | 6,851 | | | 5,894 | |
Amortization of assets subject to financing obligation | | — | | | 1,341 | | |
| Amortization of right-of-use assets for operating leases | Amortization of right-of-use assets for operating leases | | 11,840 | | | — | | Amortization of right-of-use assets for operating leases | 8,117 | | | 11,840 | |
| Bad debt expense | Bad debt expense | | 571 | | | 554 | | Bad debt expense | 415 | | | 571 | |
Stock-based compensation | Stock-based compensation | | 1,006 | | | 1,312 | | Stock-based compensation | 1,782 | | | 1,006 | |
Deferred income taxes | Deferred income taxes | | 345 | | | — | | Deferred income taxes | 0 | | | 345 | |
Equity in earnings of unconsolidated affiliate | | — | | | (198) | | |
| | Training equipment credits earned, net | Training equipment credits earned, net | | 419 | | | 473 | | Training equipment credits earned, net | 155 | | | 419 | |
Other losses, net | Other losses, net | | 227 | | | 193 | | Other losses, net | (135) | | | 227 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Receivables | Receivables | | 3,058 | | | 9,652 | | Receivables | 12,277 | | | 3,058 | |
Prepaid expenses | Prepaid expenses | | (1,347) | | | (730) | | Prepaid expenses | (2,987) | | | (1,347) | |
Other assets | Other assets | | 16 | | | 738 | | Other assets | (535) | | | 16 | |
Notes receivable | Notes receivable | | 652 | | | 743 | | Notes receivable | 134 | | | 652 | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | | 4,784 | | | (2,154) | | Accounts payable and accrued expenses | (1,480) | | | 4,784 | |
Deferred revenue | Deferred revenue | | (6,132) | | | (1,754) | | Deferred revenue | 260 | | | (6,132) | |
Income tax (receivable) payable | | (10,893) | | | 342 | | |
Income tax receivable | | Income tax receivable | 2,685 | | | (10,893) | |
Accrued tool sets and other current liabilities | Accrued tool sets and other current liabilities | | 11 | | | 644 | | Accrued tool sets and other current liabilities | 244 | | | 11 | |
Deferred rent liability | | — | | | (1,738) | | |
Lease liability | | (12,734) | | | — | | |
| Operating lease liability | | Operating lease liability | (9,159) | | | (12,734) | |
Other liabilities | Other liabilities | | (1,646) | | | (244) | | Other liabilities | (633) | | | (1,646) | |
Net cash provided by operating activities | Net cash provided by operating activities | | 10,897 | | | 2,808 | | Net cash provided by operating activities | 17,527 | | | 10,897 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | |
Purchase of held-to-maturity securities | Purchase of held-to-maturity securities | | (41,562) | | | — | | Purchase of held-to-maturity securities | 0 | | | (41,562) | |
Proceeds from maturities of held-to-maturity securities | | Proceeds from maturities of held-to-maturity securities | 18,189 | | | 0 | |
Purchase of property and equipment | Purchase of property and equipment | | (5,164) | | | (4,782) | | Purchase of property and equipment | (49,919) | | | (5,164) | |
| Proceeds from disposal of property and equipment | Proceeds from disposal of property and equipment | | 32 | | | 8 | | Proceeds from disposal of property and equipment | 6 | | | 32 | |
Return of capital contribution from unconsolidated affiliate | Return of capital contribution from unconsolidated affiliate | | 142 | | | 133 | | Return of capital contribution from unconsolidated affiliate | 150 | | | 142 | |
Net cash used in investing activities | Net cash used in investing activities | | (46,552) | | | (4,641) | | Net cash used in investing activities | (31,574) | | | (46,552) | |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | |
Proceeds from equity offering | Proceeds from equity offering | | 49,137 | | | — | | Proceeds from equity offering | 0 | | | 49,137 | |
Payment of preferred stock cash dividend | Payment of preferred stock cash dividend | | (2,632) | | | (2,618) | | Payment of preferred stock cash dividend | (2,625) | | | (2,632) | |
Payment of financing obligation and finance leases | | (37) | | | (639) | | |
Payment of finance leases | | Payment of finance leases | (64) | | | (37) | |
Payment of payroll taxes on stock-based compensation through shares withheld | Payment of payroll taxes on stock-based compensation through shares withheld | | (527) | | | (125) | | Payment of payroll taxes on stock-based compensation through shares withheld | (401) | | | (527) | |
| Net cash provided by (used in) financing activities | | 45,941 | | | (3,382) | | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (3,090) | | | 45,941 | |
Change in cash, cash equivalents and restricted cash | Change in cash, cash equivalents and restricted cash | | 10,286 | | | (5,215) | | Change in cash, cash equivalents and restricted cash | (17,137) | | | 10,286 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | | 65,442 | | | 58,104 | | Cash and cash equivalents, beginning of period | 76,803 | | | 65,442 | |
Restricted cash, beginning of period | Restricted cash, beginning of period | | 15,113 | | | 14,055 | | Restricted cash, beginning of period | 12,116 | | | 15,113 | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 80,555 | | | 72,159 | | Cash, cash equivalents and restricted cash, beginning of period | 88,919 | | | 80,555 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | | 76,606 | | | 52,925 | | Cash and cash equivalents, end of period | 58,965 | | | 76,606 | |
Restricted cash, end of period | Restricted cash, end of period | | 14,235 | | | 14,019 | | Restricted cash, end of period | 12,817 | | | 14,235 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | $ | 90,841 | | | $ | 66,944 | | Cash, cash equivalents and restricted cash, end of period | $ | 71,782 | | | $ | 90,841 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, | | |
| | 2020 | | 2019 |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Taxes refunded | | $ | (172) | | | $ | (120) | |
Interest paid | | 3 | | | 1,662 | |
Training equipment obtained in exchange for services | | 250 | | | 386 | |
Depreciation of training equipment obtained in exchange for services | | 678 | | | 742 | |
Change in accrued capital expenditures during the period | | 111 | | | 1,152 | |
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| Six Months Ended March 31, |
| 2021 | | 2020 |
Supplemental disclosure of cash flow information: | | | |
Income taxes refunded | $ | (2,693) | | | $ | (172) | |
Interest paid | 3 | | | 3 | |
Training equipment obtained in exchange for services | 227 | | | 250 | |
Depreciation of training equipment obtained in exchange for services | 646 | | | 678 | |
Change in accrued capital expenditures during the period | 1,098 | | | 111 | |
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CARES Act funds received for institutional costs (See Note 18) | 880 | | | 0 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1 - Nature of the Business
We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as well as welders and computer numerical control (“CNC”) machining technicians as measured by total average undergraduate full-time enrollment and graduates. We also provide programs for welders and computer numeric control (“CNC”) machining technicians. We offer certificate, diploma or degree programs at 1312 campuses across the United States under the banner of several well-known brands, including Universal Technical Institute, Motorcycle Mechanics Institute, Marine Mechanics Institute and NASCAR Technical Institute. We also offer manufacturer specific advanced training (“MSAT”) programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. WeFounded in 1965, we have provided technical education for 54 years.more than 55 years and have graduated more than 220,000 technicians.
We work closely with leadingover 35 original equipment manufacturers (“OEMs”) and employersindustry brand partners to understand their needs for qualified service professionals. Revenues generated from our schools consist primarily of tuition and fees paid by students. To pay for a substantial portion of their tuition, the majority of students rely on funds received from federal financial aid programs under Title IV Programs of the Higher Education Act of 1965, as amended (“HEA”), as amended, as well as from various veterans benefits programs. For further discussion, see Note 2 on “Summary of Significant Accounting Policies - Concentration of Risk” and Note 1820 on “Government Regulation and Financial Aid” included in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019.3, 2020.
During fiscal 2020, we transitioned our on-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs. This new blended learning format allowed us to continue to offer our programs to our students during the COVID-19 pandemic and aligns with an increasing trend of online education now being offered as individuals seek life-long learning opportunities. We intend to offer our Automotive, Diesel, Automotive/Diesel, Motorcycle and Marine programs in a blended learning format on a permanent basis.
Note 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. Normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods have been included. Operating results for the six months ended March 31, 20202021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.2021. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019.3, 2020.
The unaudited condensed consolidated financial statements include the accounts of Universal Technical Institute, Inc. and our wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires us 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.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 3 - Recent Accounting Pronouncements
Effective the First Quarter of Fiscal 2020
Leases2021
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which amended the FASB Accounting Standards Codification (“ASC”) by creating ASC 842 to replace ASC 840. ASU 2016-02 requires lessees to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. It also allows
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
lessors to elect not to separate lease and non-lease components when certain conditions are met. In March 2019, the FASB issued ASU 2019-01, Lease (Topic 842): Codification Improvements. ASU 2019-01 clarifies certain items regarding lessor accounting. It also clarifies the interim disclosure requirements during transition.
The new guidance in ASC 842 also provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease. We adopted ASC 842 effective October 1, 2019, and elected the package of transition practical expedients. We also elected additional transitional practical expedients that allow an entity to not reassess land easements not previously addressed under ASC 840 and to not recognize on the balance sheet leases with terms of less than 12 months. We are using the modified retrospective method without the recasting of comparative periods’ financial information. We did not elect the practical expedient to use hindsight in determining a lease term of the ROU assets at the adoption date. As a result of adopting the new standard, we recognized an operating lease liability of $163.0 million and an operating lease ROU asset of $148.6 million on October 1, 2019. The change resulted in the de-recognition of approximately $0.9 million of other assets and $15.3 million of other liabilities. The standard did not materially impact our condensed consolidated statements of operations and cash flows.
In addition, we have 2 build-to-suit leases that were accounted for as financing obligations and related assets because we had continued involvement in the related facility after the construction period was completed. The financing obligations are now classified as operating leases in accordance with the new standard as of the transition date, including recognition of operating lease ROU assets and lease liabilities. The change resulted in the de-recognition of approximately $40.7 million existing deferred financing obligations and $31.6 million in related assets. The net impact of the de-recognition and the adoption of ASC 842 as of October 1, 2019 was an increase in stockholders’ equity of approximately $9.1 million, with a subsequent adjustment during the three months ended March 31, 2020, which reduced the impact to stockholders’ equity by $0.1 million. The transition also resulted in the recognition of rent expense, which was previously reported as interest expense under the former guidance.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). ASU 2018-13 amends the disclosure requirements of ASC 820, changing the fair value measurement disclosure requirements of ASC 820 by adding new disclosure requirements, modifying existing disclosure requirements and eliminating other disclosure requirements. We adopted ASU 2018-13 as of October 1, 2019. There was no impact to our financial statements or disclosures.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and other Internal-use Software (Subtopic 350-40). ASU 2018-15 aligns the accounting for costs incurred to implement a cloud computing arrangement (“CCA”) that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. Early adoption was permitted. The effect of this new standard on our consolidated financial statements will be dependent on our entry into any future cloud computing arrangements.
Effective the First Quarter of Fiscal 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):Losses: Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 includesThis update significantly changes the way that entities measure credit losses. The new standard requires that entities estimate credit losses based upon an impairment model known as the current expected“expected credit loss model that is based on expected lossesloss” approach rather than incurred losses. Under the historical “incurred loss” approach. The new guidance, an entity recognizes as an allowance its estimate ofapproach requires entities to measure all expected credit losses whichfor financial assets based on historical experience, current conditions and reasonable forecasts of collectability. The change in approach impacts the FASB believes will result in more timelytiming of recognition of suchcredit losses. In April 2019,This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. These changes became effective for our fiscal year beginning October 1, 2020. Upon adoption on October 1, 2020, we recorded an increase in our receivables balance related to our proprietary loan program of $1.6 million, with the FASB issued ASU 2019-05, Targeted Transition Relief, which provides transition reliefcorresponding amount recorded as an increase to entities adopting ASU 2016-13. We are currently evaluating the impact that the update will have on our results of operations, financial condition and financial statement disclosures.retained earnings. No other adjustments were deemed necessary in applying this new guidance.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Effective the First Quarter of Fiscal 2022
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12this standard simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We are currently evaluating the impact that the update will have on our results of operations, financial condition and financial statement disclosures.
Note 4 - Revenue from Contracts with Customers
Nature of Goods and Services
Postsecondary Education
Revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who withdraw from our programs prior to specified dates. We apply the five-step model outlined in ASC 606, Revenue from Contracts from Customers. Tuition and fee revenue is recognized ratably over the term of the course or program offered. The majority of our programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration. We supplement our revenues with sales of textbooks and program supplies and other revenues, which are recognized as the transfer of goods or services occurs. Deferred revenue represents the excess of tuition and fee payments received as compared to tuition and fees earned and is reflected as a current liability in our condensed consolidated balance sheets because it is expected to be earned within the next 12 months.
Additionally, certain students participate in a proprietary loan program that extends repayment terms for their tuition. We purchase said loans from the lender and, based on historical collection rates, believe a portion of these loans are collectible. Accordingly, we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on the amount we expect to collect, and we recognize these revenues ratably over the term of the course or program offered.
Other
We provide dealer technician training or instructor staffing services to manufacturers. Revenues are recognized as transfer of the services occurs.
We provide postsecondary education and other services in the same geographical market, the United States. The impact of economic factors on the nature, amount, timing and uncertainty of revenue and cash flows is consistent among our various postsecondary education programs. See Note 1716 for disaggregated segment revenue information.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Contract Balances
Contract assets primarily relate to our rights to consideration for work completeda student’s progress through our training program in relation to our services performed but not billed at the reporting date. The contract assets are transferred to the receivables when the rights become unconditional. Currently, we do not have any contract assets that have not transferred to a receivable. TheOur deferred revenue is considered a contract liabilitiesliability and primarily relaterelates to service contractsour enrollment agreements where we received payments for tuition but we have not yet satisfieddelivered the related training programs to satisfying the related performance obligations. The advance consideration received from customers forstudents or Title IV funding is deferred revenue until the services is a contract liability until services are providedtraining program has been delivered to the customer.students.
The following table provides information about receivables and contract liabilitiesdeferred revenue resulting from contractsour enrollment agreements with customers:students:
| | | March 31, 2020 | | September 30, 2019 | | March 31, 2021 | | September 30, 2020 |
Receivables, which includes tuition and notes receivable | Receivables, which includes tuition and notes receivable | | $ | 40,665 | | | $ | 44,629 | | Receivables, which includes tuition and notes receivable | | $ | 43,103 | | | $ | 53,144 | |
Contract liabilities | | $ | 36,754 | | | $ | 42,886 | | |
Deferred revenue | | Deferred revenue | | 40,954 | | | 40,694 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
During the six months ended March 31, 2020,2021, the contract liabilitiesdeferred revenue balance included decreases for revenues recognized during the period and increases related to new students who started schooltheir training programs during the period.
Transaction Price Allocated to the Remaining Performance Obligations
Tuition and fee revenue is recognized ratably over the term of the course or program offered. The majority of our undergraduate programs are designed to be completed in 36 to 90 weeks, and our advanced training programs range from 12 to 23 weeks in duration.
Impacts of COVID-19
On March 19,As previously noted, during the year ended September 30, 2020, we suspended all in person classes attransitioned our 13 campuses nationwide for the safetyon-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and protection of our students and staff, to help slow the spread of COVID-19 and to complydemonstrations with state and local orders and restrictions. Upon the suspension of all in person classes, we provided all students with the opportunity to take a leave of absence. On March 25, 2020, we began offering the classroom portion of our training onlinehands-on labs so that our students who elected to remain enrolled in the program could continue their education from home. Asduring the COVID-19 pandemic. On-campus labs have been re-designed to meet the health, safety and social distancing guidelines recommended or required by the Centers for Disease Control (“CDC”) and state and local jurisdictions, while still meeting our training is a combination of classroom lecturesaccreditation and hands-on labs, there is a portion of most classes that cannot be delivered online and needs to be completed in the campus lab. While the lab portion of these classes is delayed due to the closurecurriculum requirements.
All of our campuses we presently believeremained open during the six months ended March 31, 2021, however, as of March 31, 2021, there were students with catch-up lab work outstanding and a small number of others that mostremained exclusively online. As of March 31, 2021, approximately 10% of students will still be ablewere completing catch-up lab work, but over an extended period of time, while less than 1% of students had not returned to campus to complete their undergraduate training programs within the normal timeframe,in-person labs and weremained exclusively in the online portion of the curriculum, essentially only completing half of each course. We continue to recognize revenue ratably over the term of the course or program offered.
Duringoffered, taking into consideration those only completing the three months endedonline curriculum, and the catch-up period for active students and the impact it has on expected graduation dates. As a result, as of March 31, 2020,2021, we had deferred revenue of $0.3 million for the students who would have graduated between April 1, 2020 and May 1, 2020 as the lab portion of their final class, or classes, could not be completed due to campus closures as a result of COVID-19. It is expected that these students will be given priority to complete the required lab portions of their classes when campus locations are opened again.
Note 5 - Postemployment Benefits
On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications. The last group of students started on March 18, 2019, and the campus is expected to close before the end of fiscal year 2020. We expect the postemployment benefits will total approximately $0.9 million when the campus closes in 2020.
Additionally, we periodically enter into agreements that provide postemployment benefits to personnel whose employment is terminated. On October 21, 2019, we announced the retirement of our President and Chief Executive Officer, Kimberly J. McWaters, effective October 31, 2019. During the six months ended March 31, 2020, we incurred postemployment benefit charges of $1.5 million and paid cash of $1.1 million, in accordance with Ms. McWaters’ Retirement Agreement and Release of Claims, dated October 31, 2019.
The postemployment benefit liability, which is included in “Accounts payable and accrued expenses” on the accompanying condensed consolidated balance sheets, is generally paid out ratably over the terms of the agreements, which range from 1 month to 24 months, with the final agreement expiring in 2021.
The activity for the postemployment benefit liability for the six months ended March 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Severance | | Other | | Total |
Balance accrued at beginning of period | | $ | 721 | | | $ | 32 | | | $ | 753 | |
Postemployment benefit charges | | 1,861 | | | 34 | | | 1,895 | |
Cash paid | | (1,398) | | | (32) | | | (1,430) | |
Other non-cash adjustments (a) | | 59 | | | (21) | | | 38 | |
Balance accrued at end of period | | $ | 1,243 | | | $ | 13 | | | $ | 1,256 | |
(a) Primarily relates to the reclassification of benefits between severance and other benefits.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
$0.8 million.
Note 65 - Investments
During the second quarter of 2020, we raised approximately $49.5 million in net proceeds from an underwritten public offering of shares of our common stock. See Note 15 on “Shareholders’ Equity - Equity Offering” included in our 2020 Annual Report on Form 10-K filed with the SEC on December 3, 2020 for further details on the equity offering. We invested a portion of the proceeds from the equity offering in held-to-maturity securities, which primarily consist of corporate bonds from large cap industrial and selected financial companies with a minimum credit rating of A. We have the ability and intention to hold these investments until maturity and therefore have classified these investments as held-to-maturity and recorded them at amortized cost.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The amortized cost, gross unrealized gains or losses, and fair value of investments classified as held-to-maturity at March 31, 2021 and September 30, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gross Unrealized | | | | Estimated Fair |
Due in less than 1 year: | | Amortized Cost | | Gains | | Losses | | Market Value |
Corporate bonds | | $ | 41,510 | | | $ | — | | | | $ | (233) | | | $ | 41,277 | |
Total as of March 31, 2020 | | $ | 41,510 | | | | $ | — | | | | $ | (233) | | | | $ | 41,277 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 |
| | | | Gross Unrealized | | Estimated Fair |
Due in less than 1 year: | | Amortized Cost | | Gains | | Losses | | Market Value |
Corporate and municipal bonds | | $ | 19,502 | | | $ | 1 | | | $ | (7) | | | $ | 19,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | | | Gross Unrealized | | Estimated Fair |
Due in less than 1 year: | | Amortized Cost | | Gains | | Losses | | Market Value |
Corporate and municipal bonds | | $ | 38,055 | | | $ | 10 | | | $ | (33) | | | $ | 38,032 | |
Investments are exposed to various risks, including interest rate, market and credit risk. As a result, it is possible that changes in the values of these investments may occur and that such changes could affect the amounts reported in the condensed consolidated financial statements.
Note 76 - Fair Value Measurements
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers:
Level 1: Defined as quoted market prices in active markets for identical assets or liabilities.
Level 2: Defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Defined as unobservable inputs that are not corroborated by market data.
Any transfers of investments between levels occurs at the end of the reporting period. Assets measured or disclosed at fair value on a recurring basis consisted of the following:
| | | | | | Fair Value Measurements Using | | | | | | Fair Value Measurements Using |
| | | March 31, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | March 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Money market funds (a)(1) | Money market funds (a)(1) | | $ | 35,840 | | | $ | 35,840 | | | $ | — | | | $ | — | | Money market funds (a)(1) | | $ | 42,351 | | | $ | 42,351 | | | $ | 0 | | | $ | 0 | |
Notes receivable (b)(2) | Notes receivable (b)(2) | | 34,427 | | | — | | | — | | | 34,427 | | Notes receivable (b)(2) | | 34,303 | | | 0 | | | 0 | | | 34,303 | |
Corporate bonds (c)(3) | Corporate bonds (c)(3) | | 41,277 | | | 41,277 | | | — | | | — | | Corporate bonds (c)(3) | | 16,009 | | | 16,009 | | | 0 | | | 0 | |
Municipal bonds, treasury bills, and other (a) | | 17,074 | | | 17,074 | | | — | | | — | | |
Municipal bonds and other(3) | | Municipal bonds and other(3) | | 3,487 | | | 3,487 | | | 0 | | | 0 | |
Total assets at fair value on a recurring basis | Total assets at fair value on a recurring basis | | $ | 128,618 | | | $ | 94,191 | | | $ | — | | | $ | 34,427 | | Total assets at fair value on a recurring basis | | $ | 96,150 | | | $ | 61,847 | | | $ | 0 | | | $ | 34,303 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
| | | | | | Fair Value Measurements Using | | | | | | Fair Value Measurements Using |
| | | September 30, 2019 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | September 30, 2020 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Money market funds and corporate bonds (d) | | $ | 37,794 | | | $ | 37,794 | | | $ | — | | | $ | — | | |
Money market funds(1) | | Money market funds(1) | | $ | 43,322 | | | $ | 43,322 | | | $ | 0 | | | $ | 0 | |
Notes receivable (b)(2) | Notes receivable (b)(2) | | 35,079 | | | — | | | — | | | 35,079 | | Notes receivable (b)(2) | | 32,793 | | | 0 | | | 0 | | | 32,793 | |
Corporate bonds(3) | | Corporate bonds(3) | | 33,119 | | | 33,119 | | | 0 | | | 0 | |
Municipal bonds and other(3) | | Municipal bonds and other(3) | | 4,913 | | | 4,913 | | | 0 | | | 0 | |
Total assets at fair value on a recurring basis | Total assets at fair value on a recurring basis | | $ | 72,873 | | | $ | 37,794 | | | $ | — | | | $ | 35,079 | | Total assets at fair value on a recurring basis | | $ | 114,147 | | | $ | 81,354 | | | $ | 0 | | | $ | 32,793 | |
(a)(1) Money market funds municipal bonds, treasury bills and other highly liquid investments with maturity dates less than 90 days are reflected as “Cash and cash equivalents” in our condensed consolidated balance sheet as of March 31, 2021 and September 30, 2020.
(b)(2) Notes receivable relate to our proprietary loan program.
(c)(3) Corporate bonds and municipal bonds and other are reflected as “Held-to-maturity investments” in our condensed consolidated balance sheet as of March 31, 2020.
(d) Money market funds2021 and corporate bonds are reflected as “Cash and cash equivalents” in our condensed consolidated balance sheet as of September 30, 2019.2020.
Note 87 - Property and Equipment, net
Property and equipment, net consisted of the following:
| | | Depreciable Lives (in years) | | March 31, 2020 | | September 30, 2019 | | Depreciable Lives (in years) | | March 31, 2021 | | September 30, 2020 |
Land(1) | Land(1) | | — | | $ | 3,189 | | | $ | 3,189 | | Land(1) | | — | | $ | 8,355 | | | $ | 3,189 | |
Buildings and building improvements(1) | Buildings and building improvements(1) | | 3-35 | | 26,547 | | | 82,653 | | Buildings and building improvements(1) | | 3-35 | | 68,282 | | | 28,046 | |
Leasehold improvements | Leasehold improvements | | 1-28 | | 68,075 | | | 53,020 | | Leasehold improvements | | 1-28 | | 64,232 | | | 62,899 | |
Training equipment | Training equipment | | 3-10 | | 95,114 | | | 96,737 | | Training equipment | | 3-10 | | 92,250 | | | 91,731 | |
Office and computer equipment | Office and computer equipment | | 3-10 | | 35,860 | | | 35,927 | | Office and computer equipment | | 3-10 | | 32,641 | | | 33,524 | |
Curriculum development | Curriculum development | | 5 | | 19,692 | | | 19,692 | | Curriculum development | | 5 | | 19,692 | | | 19,692 | |
Software developed for internal use | Software developed for internal use | | 1-5 | | 11,354 | | | 11,354 | | Software developed for internal use | | 1-5 | | 11,959 | | | 11,951 | |
Vehicles | Vehicles | | 5 | | 1,533 | | | 1,454 | | Vehicles | | 5 | | 1,460 | | | 1,502 | |
Right-of-use assets for finance leases | Right-of-use assets for finance leases | | Various | | 350 | | | — | | Right-of-use assets for finance leases | | 2-3 | | 359 | | | 359 | |
Construction in progress | Construction in progress | | — | | 3,859 | | | 1,631 | | Construction in progress | | — | | 1,276 | | | 2,213 | |
| | 265,573 | | | 305,657 | | | 300,506 | | | 255,106 | |
Less: Accumulated depreciation and amortization | Less: Accumulated depreciation and amortization | | (191,549) | | | (201,531) | | Less: Accumulated depreciation and amortization | | (185,585) | | | (182,363) | |
| | $ | 74,024 | | | $ | 104,126 | | | $ | 114,921 | | | $ | 72,743 | |
As previously discussed in Note 3,(1) During the adoption of ASC 842 as of October 1, 2019 resulted insix months ended March 31, 2021, land and buildings and building improvements increased due to the de-recognitionpurchase of the assets associated withbuilding and land at our financing obligations,Avondale, Arizona campus location. The total purchase price was approximately $45.2 million, of which were previously included in “Buildings$5.1 million was allocated to land and $40.1 million was allocated to buildings and building improvements.” In addition, certain items related toimprovements based upon the build-to-suit leases in “Buildings and building improvements” were reclassified to “Leasehold improvements” as part of the adoption of ASC 842. The following amounts, which are included in the above table, represented assets financed by financing obligations as of September 30, 2019:
| | | | | | | | | | |
| | | | September 30, 2019 |
Assets financed by financing obligations, gross | | | | $ | 45,816 | |
Less accumulated depreciation and amortization | | | | (14,208) | |
Assets financed by financing obligations, net | | | | $ | 31,608 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
appraised values.
Note 98 - Goodwill
Our goodwill balance of $8.2 million as of March 31, 2021 resulted from the acquisition of our motorcycle and marine education business in Orlando, Florida in 1998 and relates to our Postsecondary Education segment. Goodwill represents the excess of the cost of an acquired business over the estimated fair values of the assets acquired and liabilities assumed. Goodwill is reviewed at least annually for impairment, which may result from the deterioration in the operating performance
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge would be recognized as an expense in the period in which impairment is identified.
On As of March 19, 2020, we suspended all in person classes31, 2021, while some students were taking longer than normal to graduate from their programs due to the impacts of the COVID-19 pandemic on our business, students enrolled at our 13 campuses nationwide forOrlando, Florida campus continue to progress through their programs under the safety and protectionnew blended training model. There were no indicators of our students and staff, to help slow the spread of COVID-19, and to comply with state and local orders and restrictions. Upon the suspension of all in person classes, we provided all students with the opportunity to take a leave of absence. On March 25, 2020, we began offering the classroom portion of our training online so that students who elected to remain enrolled in the program could continue their education from home. As a result of the change in the delivery of our training programs, we performed a qualitative analysis for goodwill impairment as of March 31, 2020. No impairment indicators were identified as a result of the qualitative analysis as of March 31, 2020.
Our goodwill balance of $8.2 million as of March 31, 2020 resulted from the acquisition of our motorcycle and marine education business in Florida in 1998 and relates to our Postsecondary Education segment.2021.
Note 109 - Investment in Unconsolidated Affiliate
In 2012, we invested $4.0 million to acquire an equity interest of approximately 28% in a joint venture (“JV”) related to the lease of our Lisle, Illinois campus facility. In connection with this investment, we do not possess a controlling financial interest as we do not hold a majority of the equity interest, nor do we have the power to make major decisions without approval from the other equity member. Therefore, we do not qualify as the primary beneficiary. Accordingly, this investment is accounted for under the equity method of accounting. We recognize our proportionate share of the JV's net income or loss during each accounting period and any return of capital as a change in our investment.
Investment in unconsolidated affiliate consisted of the following and is included within “Other assets” on our condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | September 30, 2019 | | |
| | Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage |
Investment in JV | | $ | 4,401 | | | 27.972 | % | | $ | 4,338 | | | 27.972 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | September 30, 2020 |
| | Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage |
Investment in JV | | $ | 4,559 | | | 28.0 | % | | $ | 4,494 | | | 28.0 | % |
| | | | | | | | |
| | | | | | | | |
Investment in unconsolidated affiliate included the following activity during the period:
| | | Six Months Ended March 31, | | | Six Months Ended March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Balance at beginning of period | Balance at beginning of period | | $ | 4,338 | | | $ | 4,206 | | Balance at beginning of period | | $ | 4,494 | | | $ | 4,338 | |
Equity in earnings of unconsolidated affiliate | Equity in earnings of unconsolidated affiliate | | 205 | | | 198 | | Equity in earnings of unconsolidated affiliate | | 215 | | | 205 | |
Return of capital contribution from unconsolidated affiliate | Return of capital contribution from unconsolidated affiliate | | (142) | | | (133) | | Return of capital contribution from unconsolidated affiliate | | (150) | | | (142) | |
Balance at end of period | Balance at end of period | | $ | 4,401 | | | $ | 4,271 | | Balance at end of period | | $ | 4,559 | | | $ | 4,401 | |
Through September 30, 2019, the activity from equity in earnings of the unconsolidated affiliate was included in “Other (expense) income, net” on the condensed consolidated statements of operations. In conjunction with the adoption of ASC 842, as previously described in Note 3, beginning October 1, 2019, the activity is included in “Educational services and facilities” on the condensed consolidated statements of operations.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1110 - Leases
We lease 11As of March 31, 2021, we leased 9 of our 1312 campuses and our corporate headquarters under non-cancelable operating leases, some of which contain escalation clauses and requirements to pay other fees associated with the leases. The facility leases have original lease terms ranging from 8 to 20 years and expire at various dates through 2031. In addition, the leases commonly include lease incentives in the form of rent abatements and tenant improvement allowances. We sublease certain portions of unused building space to third parties, which currently resultas of March 31, 2021, resulted in minimal income. All of the leases, other than those that may qualify for the short-term scope exception of 12 months or less, are recorded on our condensed consolidated balance sheets.
Some of the facility leases are subject to annual changes in the Consumer Price Index (“CPI”). While lease liabilities are not remeasured as a result of changes to the CPI, changes to the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. There are no early termination with penalties, residual value guarantees, restrictions or covenants imposed by our facility leases.
Significant Assumptions and JudgmentsUNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
To determine if a contract is or contains a lease, we considered whether (1) explicitly or implicitly identified assets have been deployed in the contract and (2) we obtain substantially all of the economic benefits from the use of that underlying asset and
direct how and for what purpose the asset is used during the term of the contract.
If we determine a contract is, or contains, a lease, we assess whether the contract contains multiple lease components. We consider a lease component to be separate from other lease components in the contract if (a) we can benefit from the right of use either on its own or together with other resources that are readily available to us and (b) the right of use is neither highly dependent on nor highly interrelated with the other right(s) to use underlying assets in the contract. In contracts involving the use of real estate, we separate the right to use land from other underlying assets unless the effect of separating the land is insignificant to the resulting lease accounting. We have elected to account for the lease and non-lease components as a single lease component.
For all leases we are a party to, the discount rate implicit in the lease was not readily determinable. Therefore, we used our incremental borrowing rate for each lease to determine the present value of the lease. We determined the incremental borrowing rate applicable to each lease through a model that represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The incremental borrowing rate was applied to each lease based on the remaining term of the lease.
The components of lease expense are included in “Educational services and facilities” and “Selling, general and administrative” on the condensed consolidated statement of operations, with the exception of interest on lease liabilities, which is included in “Interest expense.” The components of lease expense during the three months and six months ended March 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
Lease Expense | | Three Months Ended March 31, 2020 | | Six Months Ended March 31, 2020 |
Operating lease expense (a) | | $ | 7,462 | | | $ | 14,984 | |
Finance lease expense: | | | | |
Amortization of leased assets | | 38 | | | 38 | |
Interest on lease liabilities | | 3 | | | 3 | |
Variable lease expense | | 1,180 | | | 2,179 | |
Sublease income | | (156) | | | (507) | |
Total net lease expense | | $ | 8,527 | | | $ | 16,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Six Months Ended March 31, |
Lease Expense | | 2021 | | 2020 | | 2021 | | 2020 |
Operating lease expense(1) | | $ | 5,458 | | | $ | 7,462 | | | $ | 11,590 | | | $ | 14,984 | |
Finance lease expense: | | | | | | | | |
Amortization of leased assets | | 33 | | | 38 | | | 65 | | | 38 | |
Interest on lease liabilities | | 1 | | | 3 | | | 3 | | | 3 | |
Variable lease expense | | 950 | | | 1,180 | | | 1,857 | | | 2,179 | |
Sublease income | | (123) | | | (156) | | | (246) | | | (507) | |
Total net lease expense | | $ | 6,319 | | | $ | 8,527 | | | $ | 13,269 | | | $ | 16,697 | |
(a)(1) Excludes the expense for short-term leases not accounted for under ASC 842, which was not significant for the three and six months ended March 31, 2021 and 2020.
Supplemental balance sheet, cash flow and other information related to our leases was as follows (in thousands, except lease term and discount rate):
| | | | | | | | | | | | | | | | | | | | |
Leases | | Classification | | March 31, 2021 | | September 30, 2020 |
Assets: | | | | | | |
Operating lease assets | | Right-of-use assets for operating leases | | $ | 147,651 | | | $ | 144,663 | |
Finance lease assets | | Property and equipment, net(1) | | 192 | | | 257 | |
Total leased assets | | | | $ | 147,843 | | | $ | 144,920 | |
| | | | | | |
Liabilities: | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Operating lease liability, current portion | | $ | 19,565 | | | $ | 23,666 | |
Finance lease liabilities | | Other current liabilities | | 131 | | | 129 | |
Noncurrent | | | | | | |
Operating lease liabilities | | Operating lease liability | | 140,136 | | | 134,089 | |
Finance lease liabilities | | Other liabilities | | 65 | | | 131 | |
Total lease liabilities | | | | $ | 159,897 | | | $ | 158,015 | |
(1) Finance lease assets are recorded net of accumulated amortization of $0.2 million and $0.1 million as of March 31, 2021 and September 30, 2020, respectively.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Supplemental balance sheet, cash flow and other information related to our leases was as follows:
| | | | | | | | | | | | | | |
Leases | | Classification | | As of March 31, 2020 |
Assets: | | | | |
Operating lease assets | | Right-of-use assets for operating leases | | $ | 136,784 | |
Finance lease assets | | Property and equipment, net (a) | | 312 | |
Total leased assets | | | | $ | 137,096 | |
| | | | |
Liabilities: | | | | |
Current | | | | |
Operating lease liabilities | | Operating lease liability, current portion | | $ | 25,453 | |
Finance lease liabilities | | Other current liabilities | | 124 | |
Noncurrent | | | | |
Operating lease liabilities | | Operating lease liability | | 124,873 | |
Finance lease liabilities | | Other liabilities | | 189 | |
Total lease liabilities | | | | $ | 150,639 | |
| | | | | | | | | | | | | | |
Lease Term and Discount Rate | | March 31, 2021 | | September 30, 2020 |
Weighted-average remaining lease term (in years): | | | | |
Operating leases | | 9.68 | | 9.34 |
Finance leases | | 1.58 | | 2.05 |
| | | | |
Weighted average discount rate: | | | | |
Operating leases | | 4.54 | % | | 4.37 | % |
Finance leases | | 3.08 | % | | 3.08 | % |
(a) Finance lease assets are recorded net of accumulated amortization of $37.9 thousand as of March 31, 2020. | | | | | | | | | | | | | | |
| | Six Months Ended March 31, |
Supplemental Disclosure of Cash Flow Information and Other Information | | 2021 | | 2020 |
Non-cash activity related to lease liabilities: | | | | |
Lease assets obtained in exchange for new operating lease liabilities (1) | | $ | 11,105 | | | $ | 21 | |
Leases assets obtained in exchange for new finance lease liabilities | | 0 | | | 205 | |
| | | | | | | | |
Supplemental Disclosure(1) Excludes the impact of the opening balance adjustment for the adoption of Cash Flow Information and Other Information | | Six Months Ended March 31, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 12,734 | |
Operating cash flows from finance leases | | 3 | |
Financing cash flows from finance leases | | 37 | |
| | |
Non-cash activity related to lease liabilities: | | |
Lease assets obtained in exchange for new operating lease liabilities | | $ | 21 | |
Leases assets obtained in exchange for new finance lease liabilities | | 205 | |
| | | | | | | | |
Lease Term and Discount Rate | | As of March 31, 2020 |
Weighted-average remaining lease term (in years): | | |
Operating leases | | 8.54 |
Finance leases | | 2.52 |
| | |
Weighted average discount rate: | | |
Operating leases | | 4.16 | % |
Finance leases | | 3.08 | % |
During the three months ended March 31, 2020, we discovered that the deferred loss related to two sale-and-leaseback transactions previously accounted for under ASC 840 was not addressed in the initial ASC 842 implementation. Under ASC 842, if a previously successful sale-and-leaseback transaction was accountedas of October 1, 2019 for as a sale and operating leaseback under ASC 840, as long as the sale and the leaseback were at fair value and market terms, respectively, the lessee should recognize the
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
deferred gain or loss as a cumulative-effect adjustment to equity if the sale occurred before the date of initial application. As all of these conditions were met, we recorded an additional adjustment to retained earnings of $0.1 million during the three months ended March 31, 2020 to recognize the deferred loss for the 2 previous sale-and leaseback transactions. There were no other modifications or reassessments of operating or finance leases during the three and six months ended March 31, 2020.
Maturities of lease liabilities were as follows:
| | | | | | | | | | | | | | |
| | As of March 31, 2020 | | |
Years ending September 30, | | | Operating Leases | | Finance Leases |
Remainder of 2020 | | $ | 15,103 | | | $ | 65 | |
2021 | | 28,391 | | | 132 | |
2022 | | 26,245 | | | 107 | |
2023 | | 15,629 | | | 21 | |
2024 | | 14,492 | | | — | |
2025 and thereafter | | 81,166 | | | — | |
Total lease payments | | 181,026 | | | 325 | |
Less: interest | | (30,700) | | | (12) | |
Present value of lease liabilities | | 150,326 | | | 313 | |
Less: current lease liabilities | | (25,453) | | | (124) | |
Long-term lease liabilities | | $ | 124,873 | | | $ | 189 | |
The maturities of lease liabilities as of March 31, 2020 includes the future minimum lease payments for the build-to-suit leases that were presented separately in our 2019 Annual Report on Form 10-K filed with the SEC on December 6, 2019.
Disclosures Related to Periods Prior to the Adoption of ASC 842
As of September 30, 2019, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Years ending September 30, | | | Gross | | Sublease income | | Net |
2020 | | $ | 26,379 | | | $ | (362) | | | $ | 26,017 | |
2021 | | 23,531 | | | (77) | | | 23,454 | |
2022 | | 21,621 | | | (78) | | | 21,543 | |
2023 | | 10,461 | | | (20) | | | 10,441 | |
2024 | | 9,180 | | | — | | | 9,180 | |
Thereafter | | 41,822 | | | — | | | 41,822 | |
Total lease payments | | $ | 132,994 | | | $ | (537) | | | $ | 132,457 | |
Related Party Transactions for Leases
Rent expense includes rent paid to related parties, which was approximately $0.5 million for the three months ended March 31, 2020 and 2019, respectively, and $1.0 million for the six months ended March 31, 2020 and 2019, respectively. Since 1991, certain of our properties have been leased from entities controlled by John C. White, a director on our Board of Directors.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
A portion of the property comprising our Orlando, Florida location is occupied pursuant to a lease with the John C. and Cynthia L. White 1989 Family Trust, with the lease term expiring on August 19, 2022. The annual base lease payments for the first year under this lease totaled approximately $0.3 million, with annual adjustments based on the higher of (i) an amount equal to 4% of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the Consumer Price Index.
Another portion of the property comprising our Orlando, Florida location is occupied pursuant to a lease with Delegates LLC, an entity controlled by the White Family Trust, with the lease term expiring on August 31, 2022. The beneficiaries of this trust are Mr. White’s children, and the trustee of the trust is not related to Mr. White. Annual base lease payments for the first year under this lease totaled approximately $0.7 million, with annual adjustments based on the higher of (i) an amount equal to 4% of the total annual rent for the immediately preceding year or (ii) the percentage of increase in the Consumer Price Index. These transactions were not considered significant as of March 31, 2020. | | | | | | | | | | | | | | |
| | As of March 31, 2021 |
Years ending September 30, | | Operating Leases | | Finance Leases |
Remainder of 2021 | | $ | 12,205 | | | $ | 67 | |
2022 | | 23,823 | | | 110 | |
2023 | | 19,035 | | | 23 | |
2024 | | 18,765 | | | 0 | |
2025 | | 18,993 | | | 0 | |
2026 and thereafter | | 104,647 | | | 0 | |
Total lease payments | | 197,468 | | | 200 | |
Less: interest | | (37,767) | | | (4) | |
Present value of lease liabilities | | 159,701 | | | 196 | |
Less: current lease liabilities | | (19,565) | | | (131) | |
Long-term lease liabilities | | $ | 140,136 | | | $ | 65 | |
Note 1211 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
| | | March 31, 2020 | | September 30, 2019 | | March 31, 2021 | | September 30, 2020 |
Accounts payable | Accounts payable | | $ | 9,924 | | | $ | 10,033 | | Accounts payable | $ | 10,571 | | | $ | 12,471 | |
Accrued compensation and benefits | Accrued compensation and benefits | | 26,240 | | | 22,230 | | Accrued compensation and benefits | 26,564 | | | 28,053 | |
Other accrued expenses | Other accrued expenses | | 12,957 | | | 13,615 | | Other accrued expenses | 11,953 | | | 11,367 | |
Total accounts payable and accrued expenses | Total accounts payable and accrued expenses | | $ | 49,121 | | | $ | 45,878 | | Total accounts payable and accrued expenses | $ | 49,088 | | | $ | 51,891 | |
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1312 - Income Taxes
Our income tax benefit for the three months ended March 31, 20202021 was $10.8 million,$34 thousand, or 1,632.0%2.2% of pre-tax loss, compared to income tax expense of $0.1$10.8 million, or 1.7%1,632.0% of pre-tax loss, for the three months ended March 31, 2019.2020. For the six months ended March 31, 2020,2021, our income tax benefit was $8.0 thousand, or 1.7% of pre-tax loss, compared to $10.7 million, or 261.1% of pre-tax income, compared to income tax expense of $0.2 million, or 1.7% of pre-tax loss, for the six months ended March 31, 2019.2020. The effective income tax rate in each period differed from the federal statutory tax rate of 21% primarily as a result of changes in the valuation allowance, state taxes and state taxes.the impact of net operating loss carrybacks recognized in the prior year as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The balance of the valuation allowance for our deferred tax assets was $16.1$17.5 million and $25.7$17.4 million as of March 31, 20202021 and September 30, 2019,2020, respectively. The significant decrease
As discussed in Note 13 on “Income Taxes” in our 2020 Annual Report on Form 10-K filed with the valuation allowance forSEC on December 3, 2020, during the three andyear ended September 30, 2020, we recorded an income tax refund of approximately $11.3 million as a result of certain provisions of the CARES Act, of which $7.1 million remained outstanding as of September 30, 2020. During the six months ended March 31, 2020, and the related2021, we received approximately $2.7 million in refunds, leaving $4.3 million as an income tax benefit, was primarily attributable toreceivable recorded in “Receivable, net” on the carryback of net operating losses (“NOLs”) under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the adoption of ASC 842condensed consolidated balance sheet as of October 1, 2019.
The CARES Act, which was enacted on March 27, 2020, made tax law changes to provide financial relief to companies as a result of the business impacts of COVID-19.Key income tax provisions of the CARES Act include changes in NOL carryback and carryforwards rules, acceleration of alternative minimum tax credit recovery, increase of the net interest expense deduction limit and charitable contribution limit, and immediate write-off of qualified improvement property.
The CARES Act allows us to carryback $20.3 million and $13.0 million of NOLs arising in the years ended September 30, 2019 and September 30, 2018, respectively, generating a tax refund of approximately $11.2 million.As of March 31, 2021. We expect to receive the remaining $4.3 million subsequent to the filing of our consolidated tax return for our fiscal 2020 we have recorded a receivable for the expected refund.We have also adjusted our deferred tax liabilities and deferred tax assets, and the corresponding valuation allowance, for the impact of the NOL provisions in the CARES Act.later this year.
As of March 31, 2020,2021, we continued to have a full valuation allowance against all deferred tax assets that rely upon future taxable income for their realization and will continue to evaluate our valuation allowance in future periods for any change in circumstances that causes a change in judgment about the realizability of the deferred tax assets. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future taxable income during the
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
carryforward period are increased, if objective negative evidence in the form of cumulative losses is no longer present and if additional weight may beis given to subjective evidence such as our projections for growth.
Note 1413 - Commitments and Contingencies
Legal
In the ordinary conduct of our business, we are periodically subject to lawsuits, demands in arbitration, investigations, regulatory proceedings or other claims, including, but not limited to, claims involving current or former students, routine employment matters, business disputes and regulatory demands. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we accrue a liability for the loss. When a loss is not both probable and estimable, we do not accrue a liability. Where a loss is not probable but is reasonably possible, including if a loss in excess of an accrued liability is reasonably possible, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim. Because we cannot predict with certainty the ultimate resolution of the legal proceedings (including lawsuits, investigations, regulatory proceedings or claims) asserted against us, it is not currently possible to provide such an estimate. The ultimate outcome of pending legal proceedings to which we are a party may have a material adverse effect on our business, cash flows and results of operations or financial condition.
Note 1514 - Shareholders’ Equity
Common Stock
Holders of our common stock are entitled to receive dividends when and as declared by our Board of Directors and have the right to one1 vote per share on all matters requiring shareholder approval. On June 9, 2016, our Board of Directors voted to eliminate the quarterly cash dividend on our common stock. Any future common stock dividends require the approval of a majority of the voting power of the Series A Preferred Stock.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Preferred Stock
Preferred Stock consists of 10,000,000 authorized preferred shares of $0.0001 par value each. As of March 31, 20202021 and September 30, 2019,2020, 700,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) were issued and outstanding. The liquidation preference associated with the Series A Preferred Stock was $100 per share at March 31, 20202021 and September 30, 2019.2020.
Pursuant to the terms of the Securities Purchase Agreement,Certificate of Designations of the Series A Preferred Stock, we may pay a cash dividend on each share of the Series A Preferred Stock at a rate of 7.5% per year on the liquidation preference then in effect (“Cash Dividend”). If we do not pay a Cash Dividend, the liquidation preference shall be increased to an amount equal to the current liquidation preference in effect plus an amount reflecting that liquidation preference multiplied by the Cash Dividend rate then in effect plus 2.0% per year (“Accrued Dividend”). Cash Dividends are payable semi-annually in arrears on September 30 and March 31 of each year, and begin to accrue on the first day of the applicable dividend period. We paid Cash Dividends of $2.6 million on March 27, 2020.
Equity Offering
On February 20, 2020, we entered into an Underwriting Agreement with B. Riley FBR, Inc., as representative of the several underwriters named therein (the “Underwriters”), to issue and sell an aggregate of 6,782,610 shares (the “Firm Shares”) of our common stock, par value $0.0001 per share (the “Common Stock”), in a public offering, at a price to the public of $7.75 per share, pursuant to a registration statement on Form S-3 (Registration No. 333-236146) (the “Registration Statement”) and the accompanying prospectus, and related prospectus supplement, filed with the SEC (the “Offering”). In addition, we granted the Underwriters an option (“Option”) to purchase up to an additional 1,017,390 shares of the Common Stock for a period of 30 days from February 20, 2020.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
The Offering of the Firm Shares closed on February 25, 2020. The net proceeds from the Offering were approximately $49.5 million, after deducting underwriting discounts. Direct costs of $0.4 million related to the offering were recorded to equity during the three months ended March 31, 2020. The Underwriters did not exercise2021.
For further discussion of our preferred stock, see Note 15 on “Shareholders’ Equity” included in our 2020 Annual Report on Form 10-K filed with the Option in full for the additional 1,017,390 shares. The 6,782,610 shares purchased were issued from Treasury StockSEC on February 25, 2020, leaving 82,287 shares in Treasury stock as of March 31,December 3, 2020. A portion of the proceeds were invested in short-term held-to-maturity investments during the three months ended March 31, 2020. We intend to use the proceeds for working capital, capital expenditures, and other general corporate purposes, which may include the addition of new campuses, the expansion of existing programs and the development of new programs, and the purchase of real property and campus infrastructure. We may also use a portion of the net proceeds to fund potential strategic acquisitions of complementary businesses, assets, services or technologies.
Share Repurchase Program
On December 20, 2011,10, 2020, our Board of Directors authorized a new share repurchase plan that would allow for the repurchase of up to $25.0$35.0 million of our common stock in the open market or through privately negotiated transactions. The timing and actual number of shares purchased will depend on a variety of factors such as price, corporate and regulatory requirements and prevailing market conditions. We may terminate or limit theThis new share repurchase program at any time without prior notice. We did not repurchase shares duringplan replaced the six months ended March 31, 2020 or March 31, 2019. As of March 31, 2020, we have purchased 1,677,570 shares at an average price per share of $9.09 and a total cost of approximately $15.3 millionpreviously authorized plan from fiscal 2012. Any repurchases under this program. Under the terms of the Securities Purchase Agreement, futurenew stock purchases under thisrepurchase program require the approval of a majority of the voting power of theour Series A Preferred Stock. We did not repurchase any shares during the six months ended March 31, 2021.
Note 1615 - Earnings per Share
We calculate basic earnings per common share (“EPS”) pursuant to the two-class method as a result of the issuance of the Series A Preferred Stock on June 24, 2016. Our Series A Preferred Stock is considered a participating security because, in the event that we pay a dividend or make a distribution on the outstanding common stock, we shall also pay each holder of the Series A Preferred Stock a dividend on an as-converted basis. The two-class method is an earnings allocation formula that determines earnings per shareEPS for common stock and participating securities according to dividend and participation rights in undistributed earnings. Under this method, all earnings, distributed and undistributed, are allocated to common shares and participating securities based on their respective rights to receive dividends. The Series A Preferred Stock is not included in the computation of basic earnings per common shareEPS in periods in which we have a net loss, as the Series A Preferred Stock is not contractually obligated to share in our net losses.
Diluted earnings per common shareEPS is calculated using the more dilutive of the two-class method or as-converted ormethod. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the two-class method.participating securities. The as-converted method uses net income and assumes conversion of all potential shares including the participating securities. Dilutive potential common shares include outstanding stock options, unvested restricted share awards and units and convertible preferred stock. The basic and diluted weighted average shares outstanding are the same for the three months and six months ended March 31, 20192021 as a result of the net loss reportedavailable to common shareholders and anti-dilutive impact of the potentially dilutive securities.
Subsequent to the issuance of our March 31, 2020 interim financial statements, we identified that the diluted EPS disclosures incorrectly stated that diluted EPS for the three and six months ended March 31, 2020 was calculated using the as-converted method and not the two-class method, when in fact diluted EPS was correctly calculated internally using the two-class method. The table in the disclosure summarizing the computation of diluted EPS incorrectly added back “Income allocated to participating securities” to what is equivalent to “Net income available to common shareholders” shown below and incorrectly included the corresponding 21,021 weighted average diluted participating shares outstanding in diluted shares outstanding. The disclosure errors had no impact on reported net income per diluted share for the three and six months ended
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
March 31, 2020. The disclosures below have been corrected to appropriately reflect diluted EPS under the two-class method for the three and six months ended March 31, 2020. We have concluded that these corrections were not material to the previously issued condensed consolidated financial statements for the three and six months ended March 31, 2020.
The following table summarizes the computation of basic and diluted earnings per common shareEPS under the as-convertedtwo-class or two-classas-converted method, as well as the anti-dilutive shares excluded:
| | | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | Six Months Ended |
| | March 31, | | | March 31, | | | March 31, | | March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Basic earnings per common share: | Basic earnings per common share: | | | | | | | | Basic earnings per common share: | | | | | | | |
Net income (loss) | $ | 10,142 | | | $ | (5,263) | | | $ | 14,826 | | | $ | (12,980) | | |
Net (loss) income | | Net (loss) income | $ | (1,547) | | | $ | 10,142 | | | $ | (464) | | | $ | 14,826 | |
Less: Preferred stock dividend declared | Less: Preferred stock dividend declared | (1,309) | | | (1,295) | | | (2,632) | | | (2,618) | | Less: Preferred stock dividend declared | (1,312) | | | (1,309) | | | (2,625) | | | (2,632) | |
Income (loss) available for distribution | 8,833 | | | (6,558) | | | 12,194 | | | (15,598) | | |
Net (loss) income available for distribution | | Net (loss) income available for distribution | (2,859) | | | 8,833 | | | (3,089) | | | 12,194 | |
Income allocated to participating securities | Income allocated to participating securities | (3,759) | | | — | | | (5,336) | | | — | | Income allocated to participating securities | 0 | | | (3,759) | | | 0 | | | (5,336) | |
Net income (loss) available to common shareholders | $ | 5,074 | | | $ | (6,558) | | | $ | 6,858 | | | $ | (15,598) | | |
Net (loss) income available to common shareholders | | Net (loss) income available to common shareholders | $ | (2,859) | | | $ | 5,074 | | | $ | (3,089) | | | $ | 6,858 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average basic shares outstanding | Weighted average basic shares outstanding | 28,379 | | | 25,412 | | | 27,013 | | | 25,366 | | Weighted average basic shares outstanding | 32,762 | | | 28,379 | | | 32,709 | | | 27,013 | |
| | | | | | | | | | | | | |
Basic income (loss) per common share | $ | 0.18 | | | $ | (0.26) | | | $ | 0.25 | | | $ | (0.61) | | |
Basic (loss) income per common share | | Basic (loss) income per common share | $ | (0.09) | | | $ | 0.18 | | | $ | (0.09) | | | $ | 0.25 | |
| Diluted earnings per common share: | Diluted earnings per common share: | | Diluted earnings per common share: | |
Income (loss) available for distribution | $ | 8,833 | | | $ | (6,558) | | | $ | 12,194 | | | $ | (15,598) | | |
Method used: | | Method used: | Two-class | | Two-class | | Two-class | | Two-class |
Net (loss) income available to common shareholders | | Net (loss) income available to common shareholders | $ | (2,859) | | | $ | 5,074 | | | $ | (3,089) | | | $ | 6,858 | |
| | | | | | | | | | | | | |
Weighted average basic shares outstanding | Weighted average basic shares outstanding | 28,379 | | | 25,412 | | | 27,013 | | | 25,366 | | Weighted average basic shares outstanding | 32,762 | | | 28,379 | | | 32,709 | | | 27,013 | |
Dilutive effect related to employee stock plans | Dilutive effect related to employee stock plans | 265 | | | — | | | 307 | | | — | | Dilutive effect related to employee stock plans | 0 | | | 265 | | | 0 | | | 307 | |
Dilutive effect related to preferred stock | 21,021 | | | — | | | 21,021 | | | — | | |
Weighted average diluted shares outstanding | Weighted average diluted shares outstanding | 49,665 | | | 25,412 | | | 48,341 | | | 25,366 | | Weighted average diluted shares outstanding | 32,762 | | | 28,644 | | | 32,709 | | | 27,320 | |
| | | | | | | | | | | | | |
Diluted income (loss) per common share | $ | 0.18 | | | $ | (0.26) | | | $ | 0.25 | | | $ | (0.61) | | |
Diluted (loss) income per common share | | Diluted (loss) income per common share | $ | (0.09) | | | $ | 0.18 | | | $ | (0.09) | | | $ | 0.25 | |
| Anti-dilutive shares excluded: | Anti-dilutive shares excluded: | | Anti-dilutive shares excluded: | |
Outstanding stock-based grants | Outstanding stock-based grants | 8 | | | 262 | | | 133 | | | 362 | | Outstanding stock-based grants | 467 | | | 8 | | | 677 | | | 133 | |
Convertible preferred stock | Convertible preferred stock | — | | | 21,021 | | | — | | | 21,021 | | Convertible preferred stock | 21,021 | | | 21,021 | | | 21,021 | | | 21,021 | |
Total anti-dilutive shares excluded | Total anti-dilutive shares excluded | 8 | | | 21,283 | | | 133 | | | 21,383 | | Total anti-dilutive shares excluded | 21,488 | | | 21,029 | | | 21,698 | | | 21,154 | |
| Dilutive shares under the as-converted method(1) | | Dilutive shares under the as-converted method(1) | 54,065 | | | 49,665 | | | 54,003 | | | 48,341 | |
(1) The dilutive shares under the as-converted method assume conversion of the Series A Preferred Stock and are presented here merely for reference. In a net income position, diluted earnings per share is determined by the more dilutive of the two-class method or the as-converted method.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1716 - Segment Information
Our principal business is providing postsecondary education. We also provide manufacturer-specific training, and these operations are managed separately from our campus operations. These operations do not currently meet the quantitative criteria for segments and therefore are reflected in the “Other” category. Our equity method investment and other non-postsecondary education operations are also included within the “Other” category. Corporate expenses are allocated to “Postsecondary Education” and the “Other” category based on compensation expense.
Summary information by reportable segment was as follows:
| | | | | | | | | | | | | | | | | |
| Postsecondary Education | | Other | | Consolidated |
Three Months Ended March 31, 2021 | | | | | |
Revenues | $ | 74,846 | | | $ | 2,863 | | | $ | 77,709 | |
Loss from operations | (1,322) | | | (339) | | | (1,661) | |
Depreciation and amortization (1) | 3,547 | | | 22 | | | 3,569 | |
Net loss | (1,208) | | | (339) | | | (1,547) | |
| | | | | |
Three Months Ended March 31, 2020 | | | | | |
Revenues | $ | 78,261 | | | $ | 4,456 | | | $ | 82,717 | |
(Loss) Income from operations | (591) | | | 92 | | | (499) | |
Depreciation and amortization (2) | 2,854 | | | 27 | | | 2,881 | |
Net income | 10,050 | | | 92 | | | 10,142 | |
| | | | | |
Six Months Ended March 31, 2021 | | | | | |
Revenues | $ | 148,406 | | | $ | 5,428 | | | $ | 153,834 | |
Loss from operations | (218) | | | (668) | | | (886) | |
Depreciation and amortization(1) | 6,805 | | | 46 | | | 6,851 | |
Net income (loss) | 204 | | | (668) | | | (464) | |
| | | | | |
Six Months Ended March 31, 2020 | | | | | |
Revenues | $ | 161,581 | | | $ | 8,370 | | | $ | 169,951 | |
Income (loss) from operations | 4,010 | | | (255) | | | 3,755 | |
Depreciation and amortization (2) | 5,825 | | | 69 | | | 5,894 | |
Net income (loss) | 15,081 | | | (255) | | | 14,826 | |
| | | | | |
As of March 31, 2021 | | | | | |
Total assets | $ | 433,708 | | | $ | 6,637 | | | $ | 440,345 | |
| | | | | |
As of September 30, 2020 | | | | | |
Total assets | $ | 435,144 | | | $ | 6,837 | | | $ | 441,981 | |
(1) Includes depreciation of training equipment obtained in exchange for services of $0.3 million and $0.6 million for the three months and six months ended March 31, 2021, respectively.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Summary information by reportable segment was as follows:
| | | | | | | | | | | | | | | | | |
| Postsecondary Education | | Other | | Consolidated |
Three Months Ended March 31, 2020 | | | | | |
Revenues | $ | 78,261 | | | $ | 4,456 | | | $ | 82,717 | |
(Loss) income from operations | (591) | | | 92 | | | (499) | |
Depreciation and amortization (a) | 2,854 | | | 27 | | | 2,881 | |
Net income | 10,050 | | | 92 | | | 10,142 | |
| | | | | |
Three Months Ended March 31, 2019 | | | | | |
Revenues | 77,941 | | | 3,805 | | | 81,746 | |
Loss from operations | (5,438) | | | (142) | | | (5,580) | |
Depreciation and amortization (a) | 4,041 | | | 39 | | | 4,080 | |
Net loss | (5,222) | | | (41) | | | (5,263) | |
| | | | | |
Six Months Ended March 31, 2020 | | | | | |
Revenues | 161,581 | | | 8,370 | | | 169,951 | |
Income (loss) from operations | 4,010 | | | (255) | | | 3,755 | |
Depreciation and amortization (a) | 5,825 | | | 69 | | | 5,894 | |
Net income (loss) | 15,081 | | | (255) | | | 14,826 | |
| | | | | |
Six Months Ended March 31, 2019 | | | | | |
Revenues | 157,165 | | | 7,631 | | | 164,796 | |
Loss from operations | (11,669) | | | (1,116) | | | (12,785) | |
Depreciation and amortization (a)(b) | 7,869 | | | 86 | | | 7,955 | |
Net loss | (12,061) | | | (919) | | | (12,980) | |
| | | | | |
As of March 31, 2020 | | | | | |
Total assets | 425,408 | | | 7,719 | | | 433,127 | |
| | | | | |
As of September 30, 2019 | | | | | |
Total assets | 263,974 | | | 6,552 | | | 270,526 | |
(a)(2) Excludes depreciation of training equipment obtained in exchange for services of $0.3 million and $0.7 million for the three months and six months ended March 31, 2020, respectively, and $0.4 million and $0.7 million for the three and six months ended March 31, 2019, respectively.
(b) During six months ended March 31, 2019, depreciation and amortization included $1.3 million of amortization of assets subject to a financing obligation.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Note 1817 - Government Regulation and Financial Aid
As discussed at length in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019,3, 2020, our institutions participate in a range of government-sponsored student assistance programs. The most significant of these is the federal student aid programs administered by the U.S. Department of Education (“ED”) pursuant to Title IV of the HEA,Higher Education Act (“HEA”), commonly referred to as the Title IV Programs. ToGenerally, to participate in the Title IV Programs, an institution must be licensed or otherwise legally authorized to offer its programs of instruction byoperate in the appropriate state education agencies,where it is physically located, be accredited by an accreditor recognized by ED, and be certified as an eligible institution by ED.ED, offer at least one eligible program of education, and comply with other statutory and regulatory requirements. See “Regulatory“Part I, Item 1. Regulatory Environment” in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019.3, 2020.
State Authorization and Regulation
EachTo operate and offer postsecondary programs, and to be certified to participate in Title IV Programs, each of our institutions must be authorized by the applicable state education agency where the institution is located to operateobtain and offer a postsecondary education program to our students. In some cases, our institutions also must be authorized by state education agencies in states other thanmaintain authorization from the state in which the institutionit is physically located if the(its “Home State”). To engage in recruiting or educational activities outside of its Home State, each institution recruits in the other state. State education authorization also ismay be required to participateobtain and maintain authorization from the states in the Title IV Programs. Our institutions are subject to extensive, ongoing regulation by each of these agencies. See “Regulatory Environment - State Authorization and Regulation”which it is recruiting or engaging in our 2019 Annual Report on Form 10-K filed with the SEC on December 6, 2019. We believe that each of our institutions is in substantial compliance with state education agency requirements.
educational activities. The level of regulatory oversight varies substantially from state to state and is extensive in some states. State laws typicallymay establish standards for instruction, qualifications of faculty, location and nature of facilities and equipment, administrative procedures, marketing, recruiting, student outcomes reporting, disclosure obligations to students, limitations on mandatory arbitration clauses in enrollment agreements, financial operations, and other operational matters. States often change theirSome states prescribe standards of financial responsibility and mandate that institutions post surety bonds. Many states have requirements in responsefor institutions to ED regulations or implement requirementsdisclose institutional data to current and prospective students, as well as to the public. And some states require that may impact institutional and student success, and our institutions must respond quickly to remain in compliance. Also, from time to time, states may transition authority between state agencies, and we must comply with the new state agency’s rules, procedures and other documentation requirements. If any oneschools meet prescribed performance standards as a condition of our campuses were to lose its authorization from the education agency of the state in which the campus is located, that campus would be unable to offer its programs and we could be forced to close that campus. If one of our campuses were to lose its authorization from a state other than the state in which the campus is located, that campus would not be able to recruit students in that state.continued approval.
Accreditation
Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing qualitative reviews by an organization of peer institutions. AccreditationInstitutional accreditation by an ED-recognized accrediting agencyaccreditor is required for an institution to be certified to participate in the Title IV Programs. All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges (“ACCSC”), a nationalwhich is an accrediting agency recognized by ED. ACCSC reviews the academic quality of each institution’s instructional programs, as well as the administrative and financial operations of the institution to ensure that it has the resources necessary to perform its educational mission, implement continuous improvement processes, and support student success. Our institutions must submit annual reports, and at times, supplemental reports, to demonstrate ongoing compliance and improvement. ACCSC requires institutions to disclose certain institutional information to current and prospective students, as well as to the public, and requires that our schools and programs meet various performance standards as a condition of continued accreditation. Institutions must periodically renew their accreditation by completing a comprehensive renewal of accreditation process. See “Regulatory“Part I, Item 1. Regulatory Environment - Accreditation” in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 20193, 2020 for further details.details and the current status of our campus accreditation. We believe that each of our institutions is in substantial compliance with ACCSC accreditation standards.
Our campuses’ grants of accreditation periodically expire and require renewal. A school that is faithfully engaged in the renewal of accreditation process and is meeting all of the requirements of that process continues to be accredited if the school’s term of accreditation has exceeded the period of time last granted by ACCSC. In December 2019, ACCSC conducted a renewal of accreditation on-site evaluation at our Bloomfield, New Jersey campus, which resulted in zero findings. The campus is scheduled to be considered for reaccreditation at the May 2020 Commission meeting.
Regulation of Federal Student Financial AidTitle IV Programs
The federal government provides a substantial part of its support for postsecondary education through Title IV Programs in the form of grants and loans to students who can use those funds at any institution that has been certified as eligible to participate by ED. All of our institutions are certified to participate in the Title IV Programs. ED will certify a postsecondary institutionSignificant factors relating to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to ED on an ongoing basis.that could adversely affect us include:
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
See “Regulatory Environment - Regulation•The 90/10 Rule. As a condition of Federal Student Financial Aid Programs”participation in our 2019 Annual Report on Form 10-K filedTitle IV Programs, proprietary institutions must agree when they sign their PPA to comply with the SEC90/10 rule. Under the current 90/10 rule, to remain eligible to participate in the federal student aid programs, a proprietary institution must derive at least 10% of their revenues for each fiscal year from sources other than Title IV Program funds. Under the American Rescue Plan Act of 2021 (“ARPA”), a proprietary institution must derive at least 10 percent of its revenue from sources other than “Federal education assistance funds.” Federal education assistance funds are defined as “[f]ederal funds that are disbursed or delivered to or on December 6, 2019behalf of a student to be used to attend such institution.” Pursuant to ARPA, the earliest the revision to the 90/10 rule may take effect is for further details.institutional fiscal years beginning on or after January 1, 2023.
AccreditationA proprietary institution is subject to sanctions if it exceeds the 90% level for a single year, and Innovation Regulationsloses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue from Title IV Programs/Federal education assistance funds, as applicable, for two consecutive fiscal years.
On January 7, 2019, ED released a set of draft proposed regulations for consideration and negotiation as part of its “Accreditation and Innovation” rulemaking. The draft proposed regulations covered a broad range of topics, including the following: (1) the recognition of accrediting agencies and accreditation procedures; (2) the legal authorization of institutions by states; (3) the definition of a credit hour, competency-based education, direct assessment programs and standards for distance education programs; (4) the eligibility of faith-based entities to participate in ED’s higher education and student aid programs; and (5) the Teacher Education Assistance for College and Higher Education (“TEACH”) Grant. ED released additional revisions and updates to the draft proposed regulations prior to subsequent meetings of the committee and subcommittees in early 2019. The committee and subcommittees completed their meetings in April 2019 and reached consensus on draft proposed regulations.
On June 12, 2019, ED published proposed regulations relating to the agency’s recognition of accrediting agencies and accreditation procedures and the legal authorization of institutions by states. The proposed regulations were published in a notice of proposed rulemaking in the Federal Register and made available for public comment. On November, 1, 2019, ED published the final regulations. The final regulations include revisions to the standards that accrediting agencies must meet to qualify for ED recognition, the rules governing authorization by state agencies, and certain provisions requiring institutions to report and disclose institutional information to current and prospective students. The general effective date of these final regulations is July 1, 2020.
On December 11, 2019, ED published proposed regulations relating to faith-based institutions and TEACH grants. On April 2, 2020, it published proposed rules concerning the definition of a credit hour, competency-based education, direct assessment programs and standards for distance education programs. In both cases, the proposed regulations were published in a notice of proposed rulemaking in the Federal Register and made available for public comment. If the final version of either regulatory package is promulgated prior to November, 1, 2020, its general effective date will be July 1, 2020.
Our process ofWe are currently reviewing the potential impact of any regulations issued in connection with the “Accreditation and Innovation” rulemaking is continuing.
Defense to Repayment Regulations
The current regulations on defense to repayment were published on November 1, 2016, with an effective date of July 1, 2017. On October 24, 2017, ED published an interim regulation that delayed until July 1, 2018 the effective date of the majority of the regulations. On February 14, 2018, a final rule was publishedchange in the Federal Register delaying until July 1, 2019 the effective date of the regulations. On September 12, 2018, a U.S. District Court judge issued an opinion concluding, among other things, that the delay in the effective date was unlawful. On October 16, 2018, the judge issued an order declining to extend a stay preventing the regulations from taking effect. Consequently, the November 1, 2016 regulations are now in effect.90/10 rule created under ARPA.
The November 1, 2016•Administrative Capability. To continue its participation in Title IV Programs, an institution must demonstrate that it remains administratively capable of providing the education it promises and of properly managing the Title IV Programs. ED assesses the administrative capability of each institution that participates in Title IV Programs under a series of standards listed in the regulations, included revisionswhich cover a wide range of operational and administrative topics, including the designation of capable and qualified individuals, the quality and scope of written procedures, the adequacy of institutional communication and processes, the timely resolution of issues, the sufficiency of recordkeeping, and the frequency of findings of noncompliance, to name a few. ED’s administrative capability standards thatalso include thresholds and expectations for federal student loan cohort default rates (discussed below), satisfactory academic progress, and loan counseling. Failure to satisfy any of the standards may lead ED to find the institution ineligible to participate in Title IV Programs, require the institution to repay Title IV Program funds, change the method of payment of Title IV Program funds, or place the institution on provisional certification as a condition of its continued participation or take other actions against the institution.
•Three-Year Student Loan Default Rates. To remain eligible to participate in Title IV Programs, institutions also must meet to be deemed financially responsible. Among other things, those 2016 regulations require institutions to notify ED withinmaintain federal student loan cohort default rates below specified time frameslevels. An institution whose three-year cohort default rate is 15% or greater for any one of the three preceding years is subject to a 30-day delay in receiving the first disbursement on federal student loans for first-time borrowers.
•Financial Responsibility.All institutions participating in Title IV Programs also must satisfy specific ED standards of financial responsibility. Among other things, an extensive listinstitution must meet all of events, actionsits financial obligations, including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, comply with certain past performance requirements, not receive an adverse, qualified, or conditions that occurdisclaimed opinion by its accountants in its audited financial statements. Each year, ED also evaluates institutions’ financial responsibility by calculating a “composite score,” which utilizes information provided in the institutions’ annual audited financial statements. The composite score is based on three ratios: (1) the equity ratio which measures the institution’s capital resources, ability to borrow and financial viability; (2) the primary reserve ratio which measures the institution’s ability to support current operations from expendable resources; and (3) the net income ratio which measures the institution’s ability to operate at a profit. Between composite score calculations, ED also will reevaluate the financial responsibility of an institution following the occurrence of certain “triggering events,” which must be timely reported to the agency.
•Title IV Program Rulemaking.ED is almost continuously engaged in one or after July 1, 2017. See “Regulation of Federal Student Aid Programs -more negotiated rulemakings, which is the process pursuant to which it revisits, revises, and expands the complex and voluminous Title IV Program regulations. Recent and significant negotiated rulemakings include the Gainful Employment Rulemaking, the Borrower Defense to Repayment Regulations - Financial Protection Requirements” inRulemaking, and the Accreditation and Innovation Rulemaking. New regulations associated with these rulemakings took effect on July 1, 2020, and additional, new rules will take effect on July 1, 2021. We devote significant effort to understanding the effects of these regulations on our 2019 Annual Report on Form 10-K filed with the SEC on December 6, 2019. In a March 15, 2019 electronic announcement, ED issued guidance regarding the implementation of some of the provisions of the November 1, 2016 regulations. The electronic announcement indicates that institutions have an ongoing responsibility to notify ED of subsequent actions, events or conditions. One such event is the planned closure of our Norwood, Massachusetts campus before the end of 2020, which we announced on February 18, 2019. The occurrence, and notification to ED, of such actions, events or conditions could result in ED recalculating our composite score and/or requiring us to submit a letter of credit in an amount to be calculated by EDbusiness and to agreedeveloping compliant solutions that also are congruent with our business, culture, and mission to other conditions onserve our Title IV participation, which could have a material adverse effect on our company. In Maystudents and industry relationships.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
2019,However, we submitted our formal notification to ED regarding the closurecannot predict with certainty how these new and developing regulatory requirements will be applied or whether each of our Norwood, Massachusetts campus. ED acknowledged receiptschools will be able to comply with all of the notice, but we have not received further response regarding our submission.requirements in the future.
ED held negotiated rulemaking sessions beginning in November 2017Other Federal and ending in February 2018, with the objective of modifying the defense to repayment regulations. However, no consensus was reached on the proposed regulations. ED subsequently published a notice of proposed rulemaking on July 31, 2018 that included the proposed regulations for public comment. On September 23, 2019, ED published the final regulations. The final regulations have a general effective date of July 1, 2020. The Department has not authorized institutions to early implement the new regulations prior to July 1, 2020, with the exception of certain financial responsibility regulations related to operational leases and long-term debt. Consequently, we generally will remain subject to the current regulations until the new regulations take effect on July 1, 2020.State Student Aid Programs
The final regulations published on September 23, 2019 with an effective dateSome of July 1, 2020 continueour students also receive financial aid from federal sources other than Title IV Programs, such as the programs administered by the VA, the Department of Defense (“DOD”) and under the Workforce Investment Act. Additionally, some states provide financial aid to include a list of events that could resultour students in ED determining that an institution has failed ED’s financial responsibility standards and requiring a letter of credit or otherthe form of acceptable financial protectiongrants, loans or scholarships. Our Long Beach, Rancho Cucamonga and Sacramento, California campuses, for example, are currently eligible to participate in the acceptanceCal Grant program. All of other conditions or requirements. The regulations establish revised lists of mandatory triggering events and of discretionary triggering events for which ED may determine that an institution is not able to meet its financial or administrative obligations if the events are likely to have a material adverse effect on the financial condition of the institution. The regulations require the institution to notify ED of the occurrence of a mandatory or discretionary event in accordance with procedures established by ED, typically within 10 days of the occurrence of the event with certain exceptions. ED may make a determination that an institution fails to meet the financial responsibility standards based on the occurrence of one or more mandatory or discretionary triggers and impose a letter of credit and/or other conditions upon the institution. See “Regulation of Federal Student Aid Programs - Defense to Repayment Regulations - Financial Protection Requirements” in our 2019 Annual Report on Form 10-K filedinstitutions must comply with the SEC on December 6, 2019.eligibility and participation requirements applicable to each of these funding programs, which vary by funding agency and program.
Closed School Loan Discharges
As partEach year we derive a portion of our revenues, on a cash basis, from veterans’ benefits programs, which include the borrower defense regulations ED published on September 23, 2019,Post-9/11 GI Bill, the agency revisedMontgomery GI Bill, the regulations concerning the discharge of student loans based on the school’s closure or a false claim of high school completion underReserve Education Assistance Program (“REAP”) and VA Vocational Rehabilitation. To continue participation in veterans’ benefits programs, an institution must comply with certain circumstances. The new regulations take effect on July 1, 2020 and apply to loans first disbursed on or after July 1, 2020. Among other things, the new regulations allow students to obtain a discharge if, among other requirements they were enrolled not more than 180 days before the campus closed. ED has the authority to extend the 180-day period for extenuating circumstances. The borrower also must certify that the student has not accepted the opportunity to complete, or is not continuing in, the program of study or comparable program through either an institutional teach-out plan performedestablished by the school or a teach-out agreement at another school, approved by the school’s accrediting agency and, if applicable, state licensing agency.
ED also has the authority to discharge on its own initiative the loans of qualified borrowers without a borrower application if the borrower did not subsequently re-enroll in any Title IV eligible institution within three years from the date the school closed. The September 23, 2019, regulations limit this authority to schools that close between November 1, 2013 and July 1, 2020.
On February 18, 2019, we announced that our campus in Norwood, Massachusetts is no longer accepting new student applications, and its last class group of students started on March 18, 2019. The campus is expected to close before the end of fiscal year 2020, after the July 1, 2020 effective date of the regulations. We intend to teach out all of the students currently enrolled at the campus, although certain students may elect to withdraw before graduation, and we cannot predict the number of any students who might withdraw prior to the closure of the campus and potentially qualify for a loan discharge.
An electronic announcement published by ED on November 25, 2019, stated that ED was about to begin issuing letters assessing closed school loan discharge liabilities against schools pursuant to the 2016 defense to repayment regulations. The letter stated that such schools would be given an opportunity to request reconsideration by submitting written evidence to show that the determination is unwarranted. UTI has not received any such assessment letters from ED.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
Compliance with Regulatory Standards and Requests
As described in our 2019 Annual Report on Form 10-K filed with the SEC on December 6, 2019, in connection with the issuance of our Series A Preferred Stock, effective July 2016 ED requested the submission of bi-weekly cash flow projection reports and a monthly student roster. On February 28, 2018, ED notified us that the cash flow projection reports would be required on a monthly basis instead of the previously requested bi-weekly basis. This special reporting will continue until we are otherwise notified by ED.VA.
COVID-19, and the CARES Act, the CRRSAA, and ARPA
On March 13, 2020, the United States declared a national emergency concerning the COVID-19 pandemic, effective March 1, 2020. ED, consistent with its authority under then-existing statutes and regulations, issued guidance on March 5, 2020, outlining a range of accommodations intended to address interruptions of study related to COVID-19. This guidance was updated on March 20, 2020, by adding an attachment titled “COVID-19 FAQs” to the March 5, 2020 announcement. Together, these documents offered guidance and flexibility regarding a wide range of Title IV Program requirements, including provisions relating to the offering of distance education, campus-based assistance programs, the length of an academic year, the measurement of satisfactory academic progress and the return of unearned Title IV Program funds to ED, among others. The Company reviewed and implemented many of these accommodations, including the opportunity to temporarily offer distance education.
On March 27, 2020, President Trump signed the CARES Act, which providesprovided additional flexibilities and accommodations, beyond those offered by the ED in its March 5, 2020 guidance, particularly with regard to the campus-based assistance programs, the measurement of satisfactory academic progress and the return of unearned Title IV Program funds to ED. Shortly thereafter, on April 3, 2020, ED issued further guidance, providing additional regulatory flexibilities, and in some cases, implementing the accommodations provided for in the CARES Act. ED has indicated that additionalperiodically updated and supplemented this guidance is forthcoming.
In addition to providing regulatory flexibilitiesover the following months. Guidance also was published regarding immigration, discrimination, safety, and accommodations, the CARES Act establishesprivacy issues, as well as the Higher Education Emergency Relief Fund (“HEERF”) established under the CARES Act.
On December 11, 2020, ED published a notice in the Federal Register extending the end dates of COVID-19-related waivers and modifications, and introducing several new flexibilities using its authority granted by the Higher Education Relief Opportunities for Students (“HEROES”) Act of 2003.
On December 27, 2020, President Trump signed a $2.3 trillion spending bill that combined a $1.4 trillion omnibus appropriations bill for federal fiscal year 2021 with $900 billion in supplemental appropriations to provide relief for the COVID-19 pandemic. As part of the omnibus appropriations bill, Congress simplifies the Free Application for Federal Student Aid, provides a $15 million increase to the Federal Supplemental Educational Opportunity Grant program, and adds an additional $10 million for Federal Work Study. This latter piece of legislation is known as the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (“CRRSAA”). The CRRSAA extends the Paycheck Protection Program and allocates to it an additional $284.5 billion, and includes The Higher Education Emergency Relief Fund II (“HEERF includes approximately $12.5II”), which makes an addition $22.7 billion in relief fundsavailable to be distributed directlyhigher education institutions to institutions of higher education. At least 50%mitigate the impact of the funds awarded must be used forCOVID-19 pandemic. Of this amount, private, proprietary institutions are allocated approximately $681 million and may only use HEERF II funding to provide emergency financial aid grants to students. The remaining funds can be used “to cover any costs associated with significant changes toOn January 14, 2021, ED made extensive guidance available regarding the deliveryadministration of instruction due to the coronavirus.”
In order to access the HEERF funds, institutions must complete two Funding and Certification Agreements, which obligate the recipient to administer the funds in a manner that is consistent with the CARES Act and the related guidance distributed by ED. The agreements also subject the recipient to a range of reporting and audit requirements. ED has emphasized that institutions should be prepared to report the use of the funds and to describe any internal controls the institution has in place to ensure that funds were used for allowable purposes and in accordance with cash management principles. The agency also has encouraged institutions to keep detailed records of how they are expending all funds received under the HEERF and indicated that further instructions are forthcoming in a notice in the Federal Register. A failure to administer the HEERF funds in accordance with applicable laws and guidance could result in a future repayment liability.
We continue to review the CARES Act and the guidance from ED and implement available legislative and regulatory relief as applicable.
Note 19 - Subsequent Events
HEERF FundsII program.
On April 9, 2020, we learned that we would receive approximately $33.0 millionMarch 11, 2021, President Biden signed into law the ARPA, a $1.9 trillion economic relief package. The ARPA provides almost $40 billion in HEERF funds. The allocationsfunding available to the higher education institutions under the Higher Education Emergency Relief III (“HEERF III”). Of this amount, private, proprietary institutions are set by a formula prescribed in the CARES Act, which is weighted significantly by the number of full-time students who are Pell-eligible, but also takes into consideration the total population of the schoolallocated approximately $396 million and themay only use HEERF III funding to provide emergency financial aid grants to students.
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
numberOn March 31, 2021, ED published its Guide for Compliance Attestation Engagements of students who were not enrolled full-time online beforeProprietary Schools Expending Higher Education Emergency Relief Fund Grants (the “Guide”). We are currently reviewing the COVID-19 outbreak. ED is utilizingrequirements of the most recent data available fromGuide and preparing for the Integrated Postsecondary Education Data System and Federal Student Aid for this calculation.required audit of our HEERF expenditures.
We expecthave reviewed and implemented many of the majorityflexibilities created by Congress and ED’s guidance, including the opportunity to temporarily offer distance education, discussed below, and we presently are evaluating the flexibilities and funding opportunities created by the CRRSAA and ARPA. We continue to review new guidance from ED and to implement available legislative and regulatory relief as applicable.
Distance Education
In response to the COVID-19 pandemic, ED provided broad approval for institutions to use distance learning modalities without going through the standard ED approval process for payment periods that begin on or before December 31, 2020, or the end of the payment period that includes the end date for the federally-declared emergency related to COVID-19, whichever occurs later. ED also permitted accreditors to waive their distance education review requirements. In its December 11, 2020 Federal Register notice, ED extended these flexibilities through the end of the payment period that begins after the date on which the federally-declared national emergency related to COVID-19 is rescinded. This extra payment period beyond the national emergency end date will facilitate a successful transition to non-pandemic requirements following the end of the national emergency.
We have received ACCSC approval to permanently offer blended format programs that utilize both distance and on-ground education. Additionally, we have received permanent approvals by all state agencies to offer blended format programs, with the exception of our Motorcycle and Marine programs in Orlando, Florida. We are still operating under a temporary approval for these Florida based programs as we are waiting on permanent approvals from the Florida state agency.
Note 18 - Higher Education Emergency Relief Fund Grants
Fiscal 2020 HEERF Grant for Students and Significant Changes to the Delivery of Instruction under the CARES Act
As discussed in “Note 21 - Higher Education Emergency Relief Fund under the CARES Act” in our 2020 Annual Report on Form 10-K filed with the SEC on December 3, 2020, in May 2020, we were granted approximately $33.0 million in HEERF funds will be used to grant emergency financial aid to our students impacted by COVID-19, supporting their efforts to stay in school and continue their training toward graduation and future careers. We also intended to use a portion of the funds to offset costs that have arisen as a result of the COVID-19 crisis, due to the operations and infrastructure investments needed to support our students’ education and curriculum needs during this time. These costs could include expenses associated with the initial development and online delivery of the classroom portion of our training programs, as well as the transition back to on-campus, in-person lab instruction when the authorities deem it safe to do so.
We have been allocated approximatelyat least $16.5 million in HEERF funds which arerequired to be used exclusivelyspent for emergency financial aid grants to students. Upon receipt, these funds will be deposited into a separate cash account that will be classified on our condensed consolidated balance sheet as “Restricted cash.” We are in the process of finalizing the methodologystudent and processes we will use to allocate funds to students and have already begun the outreach process and will initiate disbursements thereafter.
In addition, we were allocated approximatelyno more than $16.5 million
in HEERF funds that can be utilizedpermitted to
offset ourcover institutional costs
forassociated with significant changes to the delivery of
instruction. Thoseinstruction due to coronavirus. The allowable institutional costs for these institutional HEERF funds
will also be deposited into a separate cash account that will beare described in “Note 21 - Higher Education Emergency Relief Fund under the CARES Act” in our 2020 Annual Report on Form 10-K filed with the SEC on December 3, 2020.
During the three months ended December 31, 2020, we incurred $0.9 million in allowable costs related to the changes in the delivery of instruction due to the coronavirus, thereby utilizing the remaining available funds. Of the $0.9 million incurred, $0.3 million was recorded in “Educational services and facilities” and $0.6 million was recorded in “Selling, general and administrative” on the condensed consolidated statements of operations for the three months ended December 31, 2020. The $0.9 million was drawn down prior to December 31, 2020 and was included in our “Cash and cash equivalents” on our condensed consolidated balance sheet. Anysheets as of December 31, 2020.
As of December 31, 2020, there were no remaining unused funds in excess of our costs incurredfrom the fiscal 2020 HEERF grant.
Fiscal 2021 HEERF II Grant for Students under the CRRSAA
As noted above, the CRRSAA includes HEERF II, which makes an additional $22.7 billion available to higher education institutions. Of this amount, private, proprietary institutions are allocated approximately $681 million. The statute permits proprietary institutions to use HEERF II funds to provide financial aid grants to students, and requires that institutions prioritize the grants to students with exceptional need, such as a resultstudents who receive Pell Grants. On January 14, 2021, ED issued guidance regarding the administration of the COVID-19 crisis, could be usedHEERF II program. In accordance with the ED’s allocation schedule,
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)
during the three months ended March 31, 2021, we were granted approximately $16.8 million for purposes of funding HEERF II student grants. As of March 31, 2021, we had not yet awarded any student grants under the HEERF II program or drawn any of the grant funds. Additionally, we intend to draw down the HEERF II funds as student grants are distributed. Therefore, none of the HEERF II funds are included in “Restricted cash” on our condensed consolidated balance sheets as of March 31, 2021.
Fiscal 2021 HEERF III Grant for Students under the ARPA
As noted above, the ARPA provides almost $40 billion in funding available to higher education institutions under the HEERF III. Of this amount, private, proprietary institutions are allocated approximately $396 million and may only use HEERF III funding to provide emergency financial aid grants to studentsstudents. While we expect to receive an allocation under HEERF III, as of March 31, 2021, we have not received an allocation as the ED has not published HEERF III allocation amounts or returned to the ED.guidance.
Operational Update
As of May 4, 2020, we had over 8,000 active students in our online training program.
On May 4, 2020, we resumed in-person clinical instruction at our Dallas/Fort Worth, Texas and Houston, Texas campuses. The format for the in-person labs has been modified to follow CDC protocols, including social distancing and appropriate cleaning procedures, and will initially be limited to nine students and one instructor per session with multiple shifts per day depending upon the campus and the number of students. As our campus facilities reopen, they will initially focus on in-person labs with classroom lectures continuing to be delivered online while we are operating under social distancing guidelines.
We will continue to work with the appropriate authorities to reopen our campuses while continuing to support the health and well-being of our students, instructors and local communities.
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 condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and those in our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019.3, 2020. 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 20192020 Annual Report on Form 10-K and included in Part II, Item 1A of this Quarterly Report on Form 10-Q. See also “Special“Cautionary Note Regarding Forward-Looking Statements” on page ii of this Quarterly Report on Form 10-Q.
Company Overview
We are the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians as well asmeasured by total average undergraduate full-time enrollment and graduates. We also provide programs for welders and computer numericalnumeric control (“CNC”) machining technicians as measured by total average full-time enrollment and graduates.technicians. We offer certificate, diploma or degree programs at 1312 campuses across the United States. Additionally, weStates under the banner of several well-known brands, including Universal Technical Institute, Motorcycle Mechanics Institute, Marine Mechanics Institute and NASCAR Technical Institute. We also offer manufacturer specific advanced training (“MSAT”) programs, including student-paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers. WeFounded in 1965, we have provided technical education for 54 years.more than 55 years and have graduated more than 220,000 technicians.
We work closelyTo ensure our programs provide students with leadingthe necessary hard and soft skills needed upon graduation, we have relationships with over 35 original equipment manufacturers (“OEMs”) and employersindustry brand partners across the country to understand their needs for qualified service professionals. Through our industry relationships, we are able to continuously refine and expand our programs and curricula. We believe our industry-orientedindustry-focused educational philosophymodel and national presence have enabled us to develop valuable industry relationships, which provide us with significant competitive strengthstrengths and supportsupports our market leadership.
Participating manufacturers typically assist us in the development of course content and curricula, while providing usleadership, along with vehicles, equipment, specialty tools and parts at reduced prices or at no charge. In some instances, they offer tuition reimbursement and other hiring incentives to our graduates. Our collaboration with OEMs enablesenabling 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 receive industry-recognized certifications and credentials from the manufacturers 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.
In addition to the OEMs, our industry relationships also extend to thousands of local employers, after-market retailers, fleet service providers and enthusiast organizations. Other target groups for relationship-building, such as parts and tools suppliers, provide us with a variety of strategic and financial benefits that include equipment sponsorship, new product support, licensing and branding opportunities and financial sponsorship for our campuses and students.
On March 19,During fiscal 2020, we suspended all in person classes attransitioned our 13 campuses nationwide foron-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and demonstrations with hands-on labs. This new blended learning format allowed us to continue to offer our programs to our students during the COVID-19 pandemic and aligns with an increasing trend of online education now being offered as individuals seek life-long learning opportunities. On campus labs have been redesigned to meet the health, safety and protection of our studentssocial distancing guidelines recommended or required by the Centers for Disease Control (“CDC”) and staff, to help slow the spread of COVID-19 and to comply with state and local ordersjurisdictions, while still meeting our accreditation and restrictions. Uponcurriculum requirements. The ED granted institutions temporary approval to offer distance learning through December 31, 2020. The ED has extended these flexibilities through the suspensionend of the payment period that begins after the date on which the federally-declared national emergency related to COVID-19 is rescinded. We have received approval from the Accrediting Commission of Career Schools and Colleges (“ACCSC”) to permanently offer blended format programs that utilize both distance and on-ground education. Additionally, we have received permanent approvals by all in person classes, we provided all studentsstate agencies to offer blended format programs, with the opportunity to take a leave of absence. On March 25, 2020, we began offering the classroom portionexception of our training online so that students who electedMotorcycle and Marine programs in Orlando, Florida. We are still operating under a temporary approval for these Florida based programs as we are waiting on permanent approvals from the Florida state agency. We intend to remain enrolledoffer our Automotive, Diesel, Automotive/Diesel, Motorcycle and Marine programs in a blended learning format on a permanent basis. Additionally, we continue to invest in the program could continue their education from home.online delivery platform and curriculum to further enhance the student experience and student outcomes.
Fiscal 2020 Overview
Operations
As a result of the COVID-19 pandemic and overall concerns for student health and safety, local jurisdiction decisions that impacted our campuses and our decision to move the classroom portion of our training program online, there were a higher number of student leaves of absence during the three months ended March 31, 2020 versus the prior year comparable period. This resulted in a decrease of 3.1% in our average undergraduate full-time enrollment to 10,246 for the three months ended March 31, 2020. Despite these factors, we started 2,093 students during the three months ended March 31, 2020, which was
Overview of the Three and Six Months Ended March 31, 2021
Operations
For the three months ended March 31, 2021, we had an increase of 6.6%10.8% in our average undergraduate full-time enrollment to 11,356. Additionally, we started 2,405 new students during the three months ended March 31, 2021, which was an increase of 14.9% from the prior year comparable period, excluding the impact of the Norwood, Massachusetts campus. The increase in starts was primarily the result of both higher scheduled starts and improved show rates as a result of continued execution of transformation plan initiatives.reflecting strong front-end demand across all channels.
Our revenuesRevenues for the three months ended March 31, 20202021 were $82.7$77.7 million, an increasea decrease of $1.0$5.0 million, or 1.2%6.1%, from the comparable period in the prior year. We had a loss from operations of $0.5 million compared to a loss of $5.6 million in the prior year period. Our results of operations were impacted by the opening of our new campus in Bloomfield, New Jersey in August 2018 and our exit of the Norwood, Massachusetts campus, which will be complete by the end of fiscal 2020, as follows:
•For the three months ended March 31, 2020 and 2019, the Bloomfield, New Jersey campus had revenues of $4.2 million and $2.6 million, respectively, and direct costs of $2.3 million and $2.1 million, respectively.
•For the three months ended March 31, 2020 and 2019, the Norwood, Massachusetts campus had revenues of $0.4 million and $2.4 million, respectively, and direct costs of $1.6 million and $5.0 million, respectively. For further discussion on the Norwood closure, see the Current Report on Form 8-K filed with the SEC on February 19, 2019. Additionally, see Note 5 of the notes to our condensed consolidated financial statements herein for further discussion of the related postemployment benefits.
Our revenuesRevenues for the six months ended March 31, 20202021 were $170.0$153.8 million, an increasea decrease of $5.2$16.1 million, or 3.1%9.5%, from the comparable period in the prior year. Our operating income was $3.8 million forrevenues, including the three and six months ended March 31, 2020 compared2021, continued to a loss from operationsbe affected by impacts of $12.8 million in the prior year period. The improvement inCOVID-19 pandemic. All of our operating results was due to an increase in revenue and a decrease in expenses, partially due to a $4.0 million consultant termination fee recognizedcampuses remained open during the six months ended March 31, 2019 that was not recurring. Additionally, as noted above, our results of operations were impacted by the opening of our new campus in Bloomfield, New Jersey and our exit of the Norwood, Massachusetts campus as follows:
•For the six months ended March 31, 2020 and 2019, the Bloomfield, New Jersey campus had revenues of $8.3 million and $4.5 million, respectively, and direct costs of $4.7 million and $4.1 million, respectively.
•For the six months ended March 31, 2020 and 2019, the Norwood, Massachusetts campus had revenues of $1.2 million and $4.9 million, respectively, and direct costs of $3.4 million and $9.1 million, respectively.
As previously noted, on March 19, 2020, we suspended all in person classes at our 13 campuses nationwide to help slow the spread of COVID-19 and transitioned our training programs online2021, however, as of March 25, 2020. However, as our training is31, 2021, there were students with catch-up lab work outstanding and a combinationsmall number of classroom lecturesothers that remained exclusively online. As of March 31, 2021, approximately 10% of students were completing catch-up lab work, but over an extended period of time, while less than 1% of students had not returned to campus to complete the in-person labs and hands-on labs, there is aremained exclusively in the online portion of most classes that cannot be delivered online and needs to be completed in the campus lab. While the lab portioncurriculum, essentially only completing half of these classes is delayed due to the closure of our campuses, we presently believe that most students will still be able to complete their undergraduate training programs within the normal timeframe and weeach course. We continue to recognize revenue ratably over the term of the course or program offered. Duringoffered, taking into consideration those only completing the online curriculum, and the catch-up period for active students and the impact it has on expected graduation dates. As a result, as of March 31, 2021, we had deferred revenue of approximately $0.8 million. If students continue to remain on a leave of absence, withdraw, or do not make up the required in-person labs on a timely basis, our revenues could continue to be impacted in 2021.
We had a loss from operations of $1.7 million and $0.9 million during the three and six months ended March 31, 2021, respectively, compared to a loss of $0.5 million and income of $3.8 million during the three and six months ended March 31, 2020, respectively. The increase in our loss from operations during the three months ended March 31, 2020, we deferred2021 was primarily driven by our decrease in revenue, which was partially offset by decreases in expenses such as occupancy, advertising and travel and entertainment expenses. A decrease in revenue due to effects of $0.3 millionthe COVID-19 pandemic, partially offset by decreases in compensation and benefits, occupancy, travel and entertainment and advertising costs, primarily drove the decrease in our income from operations during the six months ended March 31, 2021.
Business Strategy
In support of our goal to continue to be the leading provider of postsecondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians, as well as welders and CNC machining technicians, and the leading supplier of entry-level skilled technicians for the students who would have graduated between April 1, 2020industries we serve, we continue to pursue the following business strategies: return on education; strengthen industry relationships; recruit, train and May 1, 2020 as the lab portion of their final class, or classes, could not be completed due to campus closures as a result of COVID-19. It is expected that these students will be given priority to complete the required lab portions of their classes when campus locations are opened again. While we presently believe that most students will still be able to complete their undergraduate training programs within the normal timeframe, we cannot predict with certainty how long each campus will remain closed as a result of COVID-19. The prolonged closure of a campus could impact the ability of students at that campus to progress throughidentify employment opportunities for more students; education program affordability; and graduate timely from their program. This could impact our revenues for the remainder of 2020.overall company growth and diversification.
During 2018, we announced and began implementation of a multi-year transformation plan. This plan included opportunities for growth with select investmentsthe six months ended March 31, 2021 some actionable steps in marketing, admissions and student services. During 2019 and continuing into 2020, we realized measurable benefits from the transformation plan, and we continued to refine and execute on these opportunities. We continue to focus on the transformation plan and existing keyexecuting our business strategies including:included:
•Expanding intoAnnouncing our plans to open two additional campus locations during fiscal 2022, including a new geographic markets either organically or through strategic acquisitions;campus in Austin, Texas and Miami, Florida.
•Offering new programs, suchWe entered into a definitive agreement to acquire MIAT College of Technology (“MIAT”) from HCP & Company. MIAT currently serves approximately 1,200 students through its campuses in Canton, MI and Houston, TX. The company offers vocational and technical certificates as well as associates degrees in fields with robust and growing demand for skilled technical workers, including aviation maintenance, energy technology, wind power, robotics and automation, non-destructive testing, HVACR, and welding. The acquisition will enable us to further expand our program offerings into growing industry sections and rapidly expanding fields likely to be bolstered by technological innovation and the country’s focus on sustainable energy. The closing of the acquisition is subject to customary closing conditions.
•Announcing the expansion of our welding technology program to our Dallas Ft. Worth, TexasBloomfield, New Jersey campus, with classes beginning in July 2021, and our plans to further expand to two more locations in fiscal 2022.
•Announcing a new manufacturer training program with AGCO Corporation, a global leader in the design, manufacture and distribution of agricultural machinery and solutions. The Fendt® Technician Academy will launch at our Lisle, Illinois campus in fiscal 2019, and to our Houston, Texas campus in fiscal 2020, and offering associate level degree programs at additional campus locations;Fall 2021.
•Maintaining and expanding relationships with OEM partners and other employersLaunching our new Premier Truck Group Technician Skills Program, a first-of-its-kind diesel-commercial vehicle technician career skills program for service members at Fort Bliss, a U.S. Army post in El Paso, Texas. The 12-week program will provide hands-on, industry-aligned technician training designed to providelead directly to rewarding career opportunities and tuition reimbursementat Premier Truck Group for our graduates;veterans transitioning from military service to civilian life. Premier Truck Group is a wholly owned subsidiary of Penske Automotive Group.
•IdentifyingAnnouncing the expansion of the Daimler Trucks North America (“DTNA”) Finish First program to our Orlando campus in summer 2021. The program, an elective offered exclusively at certain of our UTI campus locations, trains students to maintain, diagnose and executing on a variety of affordability initiatives for our students,repair DTNA's industry-leading brands, including employer financial supportFreightliner, Western Star and institutional scholarshipsDetroit. Our UTI campuses in Avondale, Arizona and grants;Lisle, Illinois currently offer the Finish First program.
•Shifting perceptionsPurchasing our Avondale, Arizona campus at the end of December 2020, for approximately $45.2 million, including closing costs and building advocacyother fees, with key policy makers and influencers; andthe intention of consolidating our MMI Phoenix, Arizona campus into the same location by the end of fiscal 2022.
•RationalizingAnnouncing the future consolidation and optimizing our real estate footprint to improve utilizationreconfiguration of the UTI and reduce cost.MMI Orlando campus facilities into one site by the end of fiscal 2021.
Graduate Employment
Our consolidated graduate employment rate forIn addition, we continue to pursue other strategic opportunities that align with our fiscal 2019 graduates as of March 31, 2020 was 2.0% lower than the rate at the same time in the prior year. The rate declined for our Automotive and Diesel Technology, Motorcycle, Marine, CNC and Welding programs, while the rate increased for our Collision Repair program.core business strategies.
Regulatory Environment
See Note 1817 of the notes to our condensed consolidated financial statements herein for a discussion of our regulatory environment.
Results of Operations: Three Months Ended March 31, 20202021 Compared to Three Months Ended March 31, 20192020
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, | | | | Three Months Ended March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Revenues | Revenues | | 100.0 | % | | 100.0 | % | Revenues | | 100.0 | % | | 100.0 | % |
Operating expenses: | Operating expenses: | | Operating expenses: | |
Educational services and facilities | Educational services and facilities | | 51.9 | % | | 56.1 | % | Educational services and facilities | | 52.1 | % | | 51.9 | % |
Selling, general and administrative | Selling, general and administrative | | 48.7 | % | | 50.8 | % | Selling, general and administrative | | 50.0 | % | | 48.7 | % |
Total operating expenses | Total operating expenses | | 100.6 | % | | 106.9 | % | Total operating expenses | | 102.1 | % | | 100.6 | % |
Loss from operations | Loss from operations | | (0.6) | % | | (6.9) | % | Loss from operations | | (2.1) | % | | (0.6) | % |
Interest income | Interest income | | 0.4 | % | | 0.5 | % | Interest income | | — | % | | 0.4 | % |
Interest expense | Interest expense | | — | % | | (1.0) | % | Interest expense | | — | % | | — | % |
Other (expense) income, net | | (0.6) | % | | 1.0 | % | |
Total other (expense) income, net | | (0.2) | % | | 0.5 | % | |
Other income (expense), net | | Other income (expense), net | | 0.1 | % | | (0.6) | % |
Total other income (expense), net | | Total other income (expense), net | | 0.1 | % | | (0.2) | % |
Loss before income taxes | Loss before income taxes | | (0.8) | % | | (6.4) | % | Loss before income taxes | | (2.0) | % | | (0.8) | % |
Income tax benefit (expense) | | 13.1 | % | | (0.1) | % | |
Net income (loss) | | 12.3 | % | | (6.5) | % | |
Income tax benefit | | Income tax benefit | | — | % | | 13.1 | % |
Net (loss) income | | Net (loss) income | | (2.0) | % | | 12.3 | % |
Preferred stock dividends | Preferred stock dividends | | 1.6 | % | | 1.6 | % | Preferred stock dividends | | 1.7 | % | | 1.6 | % |
Income (loss) available for distribution | | 10.7 | % | | (8.1) | % | |
(Loss) income available for distribution | | (Loss) income available for distribution | | (3.7) | % | | 10.7 | % |
Revenues
Our revenuesRevenues for the three months ended March 31, 20202021 were $82.7$77.7 million, an increasea decrease of $1.0$5.0 million, or 1.2%6.1%, as compared to revenues of $81.7$82.7 million for the three months ended March 31, 2019.2020. During the three months ended March 31, 2020,2021, we implemented tuition rate increases of 3.5% for our auto, diesel, welding and marine programs. Partially offsetting this ratehad a 10.8% increase was a 3.1% decrease in our average full-time student enrollment and a 14.9% increase in new student starts reflecting strong front-end demand across all channels. However, our revenue recognized for active students during the period has been impacted by overall lower average revenue per student driven by the pace in which students are progressing through their programs and by students retaking courses previously completed or attempted, primarily due to the impacts of COVID-19.
Additionally, as a result of higher student leavesthe catch-up labs not yet completed, as of absence due to COVID-19. Additionally,March 31, 2021 we had deferred revenue of $0.8 million. We recognized $1.7$1.8 million on an accrual basis related to revenues and interest under our proprietary loan program for the three months ended March 31, 20202021 as compared to $1.5$1.7 million for the three months ended March 31, 2019.2020.
Educational services and facilities expenses
Our educationalEducational services and facilities expenses were $40.5 million for the three months ended March 31, 2021, which represents a decrease of $2.4 million as compared to $42.9 million for the three months ended March 31, 2020, which represents a decrease of $2.9 million as compared to $45.8 million for the three months ended March 31, 2019.2020.
The following table sets forth the significant components of our educational services and facilities expenses (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2020 | | 2019 |
Salaries expense | | 18,770 | | | $ | 20,513 | |
Employee benefits and tax | | 3,387 | | | 4,280 | |
Bonus expense | | 195 | | | 62 | |
Stock-based compensation | | 18 | | | — | |
Compensation and related costs | | 22,370 | | | 24,855 | |
Depreciation and amortization expense | | 3,039 | | | 3,969 | |
Occupancy costs | | 9,513 | | | 8,822 | |
Other educational services and facilities expense | | 3,119 | | | 3,143 | |
Contract service expense | | 891 | | | 1,015 | |
Student expense | | 896 | | | 476 | |
Taxes and licensing expense | | 651 | | | 959 | |
Supplies and maintenance expense | | 2,430 | | | 2,583 | |
| | | | |
| | | | |
Total educational services and facilities expense | | $ | 42,909 | | | $ | 45,822 | |
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Salaries expense | | $ | 19,008 | | | $ | 18,770 | |
Employee benefits and tax | | 2,664 | | | 3,387 | |
Bonus expense | | 389 | | | 195 | |
Stock-based compensation | | 39 | | | 18 | |
Compensation and related costs | | 22,100 | | | 22,370 | |
Occupancy costs | | 7,449 | | | 9,513 | |
Depreciation and amortization expense | | 3,388 | | | 3,039 | |
Supplies and maintenance expense | | 2,541 | | | 2,430 | |
Taxes and licensing expense | | 885 | | | 651 | |
Student expense | | 767 | | | 896 | |
Contract services expense | | 598 | | | 891 | |
Other educational services and facilities expense | | 2,752 | | | 3,119 | |
Total educational services and facilities expense | | $ | 40,480 | | | $ | 42,909 | |
Compensation and related costs remained relatively consistent for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Occupancy costs decreased $2.5by $2.1 million for the three months ended March 31, 2021. The decrease was primarily attributed to cost reductions from closing our Norwood, Massachusetts campus, downsizing our Exton, Pennsylvania and Sacramento, California campuses, and purchasing our Avondale, Arizona campus in December 2020.
Depreciation and amortization expense increased $0.3 million for the three months ended March 31, 2021 primarily due to the purchase of our Avondale, Arizona campus in December 2020.
Other educational services and facilities expense decreased by $0.4 million for the three months ended March 31, 2021, primarily due to a decrease of $0.2 million in expenses related to our accrued tool sets and decreased travel and entertainment costs.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended March 31, 2021 were $38.9 million. This represents a decrease of $1.4 million, as compared to $40.3 million for the three months ended March 31, 2020.
The following table sets forth the significant components of our selling, general and administrative expenses (in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2021 | | 2020 |
Salaries expense | | $ | 13,918 | | | $ | 13,684 | |
Employee benefits and tax | | 2,551 | | | 3,155 | |
Bonus expense | | 3,164 | | | 2,951 | |
Stock-based compensation | | 1,270 | | | 975 | |
Compensation and related costs | | 20,903 | | | 20,765 | |
Advertising expense | | 10,592 | | | 11,564 | |
Contract services expense | | 1,692 | | | 1,182 | |
Professional services expense | | 1,582 | | | 1,004 | |
Depreciation and amortization expense | | 181 | | | 197 | |
Other selling, general and administrative expenses | | 3,940 | | | 5,595 | |
Total selling, general and administrative expenses | | $ | 38,890 | | | $ | 40,307 | |
Compensation and related costs remained relatively consistent for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Advertising expense decreased by $1.0 million for the three months ended March 31, 2021, primarily due to timing of spend and targeted cost-efficient marketing efforts, with a shift away from television advertising toward digital media.
Contract services and professional services expenses increased $0.5 million and $0.6 million, respectively, for the three months ended March 31, 2021. The increases were primarily due to costs incurred related to our growth and diversification initiatives, including the announced acquisition of MIAT.
Other selling, general and administrative expenses decreased by $1.7 million for the three months ended March 31, 2020.2021. The overall decrease was attributable to lower headcount compared to the prior year period.
•Employee benefits and tax decreased $0.9 million for three months ended March 31, 2020. The decrease wasprimarily due to lower headcountdecreases in travel and lowerentertainment of $0.7 million, occupancy costs of $0.3 million due to relocating and downsizing our headquarters, bad debt expense of $0.3 million, and nominal decreases in taxes and licensing, employment advertising and recruitment due to overall cost per employee from implementing new benefit plans at the beginning of fiscal 2020.control measures.
Depreciation and amortization expense decreased $0.9 millionIncome taxes
Our income tax benefit for the three months ended March 31, 2020, due2021 was $34.0 thousand, or 2.2% of pre-tax loss, compared to the adoptionincome tax benefit of ASU 2016-02, Leases (Topic 842) (“ASC 842”)as$10.8 million, or 1,632.0% of October 1, 2019, whereby the assets that were previously financed by finance obligations were converted to operating leases. Operating leases assets are classified in “Right-of-use assets for operating leases” on the condensed consolidated balance sheet and the related operating lease expense now rolls into “Occupancy costs” in the table above.
Occupancy costs increased $0.7 millionpre-tax loss, for the three months ended March 31, 2020. The increase waseffective income tax rate in each period differed from the federal statutory tax rate of 21% primarily attributedas a result of changes in the valuation allowance, state taxes and the impact of net operating loss carrybacks recognized in the prior year as a result of the CARES Act. We recorded a full valuation allowance against the deferred tax assets as of March 31, 2021 and March 31, 2020.
Preferred stock dividends
On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.2 million in issuance costs. Pursuant to the adoptionCertificate of ASC 842 asDesignations of October 1, 2019 as described above.
Student expense increased $0.4the Series A Preferred Stock, we recorded a preferred stock cash dividend of $1.3 million for the three months ended March 31, 2020. The increase was primarily attributed2021 and 2020, respectively.
Net (loss) income available for distribution
Net (loss) income available for distribution refers to student housing expenses.
Taxesthe net income or net loss reduced by dividends on our Series A Preferred Stock. As a result of the foregoing, we reported a net loss available for distribution for the three months ended March 31, 2021 of $2.9 million and licensing decreased $0.3net income available for distribution of $8.8 million for the three months ended March 31, 2020.
Results of Operations: Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020
The following table sets forth selected statements of operations data as a percentage of revenues for each of the periods indicated.
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, |
| | 2021 | | 2020 |
Revenues | | 100.0 | % | | 100.0 | % |
Operating expenses: | | | | |
Educational services and facilities | | 51.9 | % | | 50.5 | % |
Selling, general and administrative | | 48.7 | % | | 47.3 | % |
Total operating expenses | | 100.6 | % | | 97.8 | % |
(Loss) income from operations | | (0.6) | % | | 2.2 | % |
Interest income | | — | % | | 0.4 | % |
Interest expense | | — | % | | — | % |
Other income (expense), net | | 0.2 | % | | (0.2) | % |
Total other income, net | | 0.2 | % | | 0.2 | % |
(Loss) income before income taxes | | (0.3) | % | | 2.4 | % |
Income tax benefit | | — | % | | 6.3 | % |
Net (loss) income | | (0.3) | % | | 8.7 | % |
Preferred stock dividends | | 1.7 | % | | 1.6 | % |
(Loss) income available for distribution | | (2.0) | % | | 7.1 | % |
Revenues
Revenues for the six months ended March 31, 2021 were $153.8 million, a decrease of $16.1 million, or 9.5%, as compared to revenues of $170.0 million for the six months ended March 31, 2020. During the six months ended March 31, 2021, we had a 6.1% increase in our average full-time student enrollment and a 17.5% increase in new student starts, reflecting strong front-end demand across all channels. However, our revenue recognized for active students during the period has been impacted by overall lower average revenue per student driven by the pace in which students are progressing through their programs and by students retaking courses previously completed or attempted, primarily due to the impacts of COVID-19. Additionally, as a result of the catch-up labs not yet completed, as of March 31, 2021 we had deferred revenue of $0.8 million. We recognized $3.5 million on an accrual basis related to revenues and interest under our proprietary loan program for the six months ended March 31, 2021, and 2020, respectively.
Educational services and facilities expenses
Educational services and facilities expenses were $79.8 million for the six months ended March 31, 2021, which represents a decrease of $6.0 million as compared to $85.8 million for the six months ended March 31, 2020.
The following table sets forth the significant components of our educational services and facilities expenses (in thousands):
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, |
| | 2021 | | 2020 |
Salaries expense | | $ | 36,844 | | | $ | 37,854 | |
Employee benefits and tax | | 5,636 | | | 6,428 | |
Bonus expense | | 843 | | | 566 | |
Stock-based compensation | | 65 | | | 18 | |
Compensation and related costs | | 43,388 | | | 44,866 | |
Occupancy costs | | 15,717 | | | 19,351 | |
Depreciation and amortization expense | | 6,453 | | | 6,005 | |
Supplies and maintenance expense | | 4,799 | | | 4,887 | |
Student expense | | 2,151 | | | 1,501 | |
Contract services expense | | 1,294 | | | 1,600 | |
Taxes and licensing expense | | 1,274 | | | 1,305 | |
Other educational services and facilities expense | | 4,735 | | | 6,270 | |
Total educational services and facilities expense | | $ | 79,811 | | | $ | 85,785 | |
Compensation and related costs decreased $1.5 million for the six months ended March 31, 2021.
•Salaries expense decreased $1.0 million for the six months ended March 31, 2021 primarily due to a decrease in instructor salaries resulting from lower instructor headcount.
•Employee benefits and tax decreased $0.8 million for six months ended March 31, 2021. The decrease was primarily due to lower medical claims expense.
Occupancy costs decreased $3.6 million for the six months ended March 31, 2021. The decrease was primarily attributed to decline in real estate property taxescost reductions from exiting theclosing our Norwood, Massachusetts campus.campus, downsizing our Exton, Pennsylvania and Sacramento, California campuses, and purchasing our Avondale, Arizona campus in December 2020.
Depreciation and amortization expense increased $0.4 million for the six months ended March 31, 2021 primarily due to the purchase of our Avondale, Arizona campus in December 2020.
Other educational services and facilities expense decreased $1.5 million primarily due to a decrease of $0.7 million in expenses related to our accrued tool sets, and broad decreases related to travel and entertainment costs, MSAT related expenses, and other expenses as a result of cost control measures implemented. Additionally, the six months ended March 31, 2021 includes a $0.3 million credit for the reimbursement of allowable costs related to the changes in the delivery of instruction due to the coronavirus. The allowable costs are included in the relevant line items above. See Note 18 of the notes to the condensed consolidated financial statements herein for a discussion on the Higher Education Emergency Relief Fund (“HEERF”) established under the CARES Act.
Selling, general and administrative expenses
Our selling,Selling, general and administrative expenses for the threesix months ended March 31, 20202021 were $40.3$74.9 million. This represents a decrease of $1.2$5.5 million, as compared to $41.5$80.4 million for the threesix months ended March 31, 2019.2020.
The following table sets forth the significant components of our selling, general and administrative expenses (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
Salaries expense | $ | 13,684 | | | $ | 14,920 | | | | | |
Employee benefits and tax | 3,155 | | | 3,707 | | | | | |
Bonus expense | 2,951 | | | 2,185 | | | | | |
Stock-based compensation | 975 | | | 668 | | | | | |
Compensation and related costs | 20,765 | | | 21,480 | | | | | |
Advertising expense | 11,564 | | | 11,348 | | | | | |
Contract services expense | 1,182 | | | 1,031 | | | | | |
Depreciation and amortization expense | 197 | | | 368 | | | | | |
| | | | | | | |
Professional services expense | 1,004 | | | 1,963 | | | | | |
Other selling, general and administrative expenses | 5,595 | | | 5,314 | | | | | |
Total selling, general and administrative expenses | $ | 40,307 | | | $ | 41,504 | | | | | |
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, |
| | 2021 | | 2020 |
Salaries expense | | $ | 27,872 | | | $ | 29,354 | |
Employee benefits and tax | | 5,402 | | | 6,251 | |
Bonus expense | | 6,613 | | | 6,955 | |
Stock-based compensation | | 1,792 | | | 989 | |
Compensation and related costs | | 41,679 | | | 43,549 | |
Advertising expense | | 19,622 | | | 21,017 | |
Contract services expense | | 2,915 | | | 2,302 | |
Professional services expense | | 2,528 | | | 2,023 | |
Depreciation and amortization expense | | 398 | | | 567 | |
Other selling, general and administrative expenses | | 7,767 | | | 10,953 | |
Total selling, general and administrative expenses | | $ | 74,909 | | | $ | 80,411 | |
Compensation and related costs decreased $0.7$1.9 million for the threesix months ended March 31, 2020:2021:
•Salaries expense decreased by $1.2 million for the three months ended March 31, 2020. The decrease was primarily due to lower headcount compared to the prior year and losses recognized on our qualified deferred compensation plan.
•Employee benefits and tax decreased $0.6 million for the three months ended March 31, 2020. The decrease was due to lower headcount and lower cost per employee from implementing new benefit plans in the first quarter of fiscal 2020.
•Bonus expense increased by $0.8 million for the three months ended March 31, 2020. The increase was the result of improved performance.
Professional services expenses decreased $1.0 million for the three months ended March 31, 2020. The decrease was primarily due to lower legal and accounting fees. The decrease in professional services was partially offset by nominal increases, primarily in other selling, general and administrative and advertising expense.
Income taxes
Our income tax benefit for the three months ended March 31, 2020 was $10.8 million, or 1,632.0% of pre-tax loss, compared to income tax expense of $0.1 million, or 1.7% of pre-tax loss, for the three months ended March 31, 2019. The effective income tax rate in each period differed from the federal statutory tax rate of 21% primarily as a result of changes in the valuation allowance and state taxes.We recorded a full valuation allowance against the deferred tax assets as of March 31, 2020 and March 31, 2019. The significant decrease in the valuation allowance for the three months ended March 31, 2020, and the related income tax benefit, was primarily attributable to the carryback of net operating losses (“NOLs”) under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). See Note 13 in the notes to the condensed consolidated financial statements herein for further information on the impacts of the CARES Act.
Preferred stock dividends
On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.1 million in issuance costs. In accordance with the terms of the related purchase agreement, we recorded a preferred stock cash dividend of $1.3 million for the three months ended March 31, 2020 and 2019.
Net income (loss) available for distribution
Net income (loss) available for distribution refers to the net income or net loss reduced by dividends on our Series A Preferred Stock. As a result of the foregoing, we reported net income available for distribution for the three months ended March 31, 2020 of $8.8 million and a loss available for distribution of $6.6 million for the three months ended March 31, 2019.
Results of Operations: Six Months Ended March 31, 2020 Compared to Six Months Ended March 31, 2019
The following table sets forth selected statements of operations data as a percentage of revenues for each of the periods indicated.
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, | | |
| | 2020 | | 2019 |
Revenues | | 100.0 | % | | 100.0 | % |
Operating expenses: | | | | |
Educational services and facilities | | 50.5 | % | | 55.6 | % |
Selling, general and administrative | | 47.3 | % | | 52.2 | % |
Total operating expenses | | 97.8 | % | | 107.8 | % |
Income (loss) from operations | | 2.2 | % | | (7.8) | % |
Interest income | | 0.4 | % | | 0.5 | % |
Interest expense | | — | % | | (1.0) | % |
Other (expense) income, net | | (0.2) | % | | 0.5 | % |
Total other (expense) income, net | | 0.2 | % | | — | % |
Income (loss) before income taxes | | 2.4 | % | | (7.8) | % |
Income tax benefit (expense) | | 6.3 | % | | (0.1) | % |
Net income (loss) | | 8.7 | % | | (7.9) | % |
Preferred stock dividends | | 1.6 | % | | 1.6 | % |
Income (loss) available for distribution | | 7.1 | % | | (9.5) | % |
Revenues
Our revenues for the six months ended March 31, 2020 were $170.0 million, an increase of $5.2 million, or 3.1%, as compared to revenues of $164.8 million for the six months ended March 31, 2019. During the six months ended March 31, 2020, we implemented tuition rate increases of 3.5% for our auto, diesel, welding and marine programs and 15.0% for our motorcycle program. Our average full-time student enrollment increased 0.2%. Additionally, we recognized $3.5 million on an accrual basis related to revenues and interest under our proprietary loan program for the six months ended March 31, 2020 as compared to $3.2 million for the six months ended March 31, 2019.
Educational services and facilities expenses
Our educational services and facilities expenses were $85.8 million for the six months ended March 31, 2020, which represents a decrease of $5.8 million as compared to $91.6 million for the six months ended March 31, 2019.
The following table sets forth the significant components of our educational services and facilities expenses (in thousands):
| | | | | | | | | | | | | | |
| | Six Months Ended March 31, | | |
| | 2020 | | 2019 |
Salaries expense | | $ | 37,854 | | | $ | 40,609 | |
Employee benefits and tax | | 6,428 | | | 8,240 | |
Bonus expense | | 566 | | | 230 | |
Stock-based compensation | | 18 | | | — | |
Compensation and related costs | | 44,866 | | | 49,079 | |
Depreciation and amortization expense | | 6,005 | | | 7,744 | |
Occupancy costs | | 19,351 | | | 17,849 | |
Other educational services and facilities expense | | 6,270 | | | 6,517 | |
Contract service expense | | 1,600 | | | 2,054 | |
Student expense | | 1,501 | | | 1,260 | |
Taxes and licensing expense | | 1,305 | | | 1,862 | |
Supplies and maintenance expense | | 4,887 | | | 5,192 | |
| | | | |
| | | | |
Total educational services and facilities expense | | $ | 85,785 | | | $ | 91,557 | |
Compensation and related costs decreased $4.2 million for the six months ended March 31, 2020.
•Salaries expense decreased $2.8 million for the six months ended March 31, 2020. The decrease was attributable to lower headcount compared to the prior year period.
•Employee benefits and tax decreased $1.8 million for six months ended March 31, 2020. The decrease was due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.
Depreciation and amortization expense decreased $1.7 million for the the six months ended March 31, 2020, due to the adoption of ASU 842 as of October 1, 2019, whereby the assets that were previously financed by finance obligations were converted to operating leases. Operating leases assets are classified in “Right-of-use assets for operating leases” on the condensed consolidated balance sheet and the related operating lease expense now rolls into “Occupancy costs” in the table above.
Occupancy costs increased $1.5 million for the six months ended March 31, 2020. The increase was primarily attributed to the adoption ASU 842 as of October 1, 2019 as described above.
Contract service expense decreased $0.5 million during the six months ended March 31, 2020. The decrease was primarily attributed to phasing out contracts with third parties performing Free Application for Federal Student Aid related duties and absorbing these responsibilities internally.
Taxes and licensing decreased $0.6 million for the six months ended March 31, 2020. The decrease was attributed to a decline in real estate property taxes from exiting the Norwood, Massachusetts campus.
Selling, general and administrative expenses
Our selling, general and administrative expenses for the six months ended March 31, 2020 were $80.4 million. This represents a decrease of $5.6 million, as compared to $86.0 million for the six months ended March 31, 2019.
The following table sets forth the significant components of our selling, general and administrative expenses (in thousands):
| | | | | | | | | | | |
| Six Months Ended March 31, | | |
| 2020 | | 2019 |
Salaries expense | $ | 29,354 | | | $ | 29,831 | |
Employee benefits and tax | 6,251 | | | 7,238 | |
Bonus expense | 6,955 | | | 4,847 | |
Stock-based compensation | 989 | | | 1,362 | |
Compensation and related costs | 43,549 | | | 43,278 | |
Advertising expense | 21,017 | | | 21,931 | |
Contract services expense | 2,302 | | | 6,484 | |
Depreciation and amortization expense | 567 | | | 749 | |
| | | |
Professional services expense | 2,023 | | | 2,645 | |
Other selling, general and administrative expenses | 10,953 | | | 10,937 | |
Total selling, general and administrative expenses | $ | 80,411 | | | $ | 86,024 | |
Compensation and related costs increased $0.3 million for the six months ended March 31, 2020:
•Salaries expense decreased by $0.5 million for the six months ended March 31, 2020.2021. The decrease was primarily due to lower headcount compared to the prior year, partially offset by costsseverance expense related to the retirement of Kimberly J. McWaters, our former President and Chief Executive Officer, in October of 2019.the six months ended March 31, 2020.
•Employee benefits and tax decreased $1.0$0.8 million for the six months ended March 31, 2020.2021. The decrease was primarily due to lower headcount and lower cost per employee from implementing new benefit plans at the beginning of fiscal 2020.medical claims expense.
•
Bonus
Advertising expense increased by $2.1decreased $1.4 million for the six months ended March 31, 2020. The increase was the result2021, primarily due to timing of improved Company performance.spend and targeted cost-efficient marketing efforts, with a shift away from television advertising toward digital media.
AdvertisingContract services expense decreased $0.9increased $0.6 million and professional services expense increased $0.5 million for the six months ended March 31, 2020.2021. The decrease was attributableincreases were primarily due to a changecosts incurred related to our growth and diversification initiatives, including the announced acquisition of MIAT.
Other selling, general and administrative expenses decreased $3.2 million primarily due to decreases of $1.6 million in spending pattern versus the prior year period.
Contract services expense decreased $4.2travel and entertainment costs and $0.5 million forin occupancy costs due to relocating and downsizing our headquarters. Additionally, the six months ended March 31, 2020. The decrease was attributable to2021 includes a $4.0 million consultant termination fee recognized during the six months ended March 31, 2019 that was not recurring.
Professional services expenses decreased $0.6 million credit for the six months ended March 31, 2020. The decrease was primarilyreimbursement of allowable costs related to the changes in the delivery of instruction due to lower legal and accounting fees.the coronavirus. The allowable costs are included in the relevant line items above. See Note 18 of the notes to the condensed consolidated financial statements herein for a discussion on the HEERF funds.
Income taxes
Our income tax benefit for the six months ended March 31, 20202021 was $8.0 thousand, or 1.7% of pre-tax loss, compared to $10.7 million, or 261.1% of pre-tax income, compared to income tax expense of $0.2 million, or 1.7% of pre-tax loss, for the six months ended March 31, 2019.2020. The effective income tax rate in each period differed from the federal statutory tax rate of 21% primarily as a result of changes in the valuation allowance and state taxes. We recorded a full valuation allowance against the deferred tax assets as of March 31, 20202021 and March 31, 2019.2020. The significant decrease in the valuation allowance for the six months ended March 31, 2020, and the related income tax benefit, was primarily attributable to the carryback of NOLs under the provisions of the CARES Act and the adoption of ASC 842 as of October 1, 2019. See Note 13 in the notes to the condensed consolidated financial statements herein for further information on the impacts of the CARES Act.
Preferred stock dividends
On June 24, 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash, less $1.1$1.2 million in issuance costs. In accordance with the terms of the related purchase agreement, we recorded and paid a preferred stock cash dividend of $2.6 million for the six months ended March 31, 20202021 and 2019,2020, respectively.
Net (loss) income (loss) available for distribution
Net (loss) income (loss) available for distribution refers to the net income or net loss reduced by dividends on our Series A Preferred Stock. As a result of the foregoing, we reported a net incomeloss available for distribution for the six months ended March 31, 20202021 of $12.2$3.1 million and a lossnet income available for distribution of $15.6$12.2 million for the six months ended March 31, 2019.2020.
Non-GAAP Financial Measures
Our earnings before interest income, income taxes, depreciation and amortization (“EBITDA”) for the three months and six months ended March 31, 2021 were $2.0 million and $6.3 million, respectively, compared to $2.2 million and $10.0 million for the three months and six months ended March 31, 2020, were $2.2 million and $10.0 million, respectively, compared to a loss of $0.3 million and $3.2 millionrespectively. We define EBITDA as net income (loss) for the threeyear, before interest (income) expense, income tax (benefit) expense, and six months ended March 31, 2019, respectively.depreciation and amortization.
EBITDA is a non-GAAP financial measure which is provided to supplement, but not substitute for, the most directly comparable GAAP measure. We choose to disclose this non-GAAP financial measure because it provides an additional analytical tool to clarify our results from operations and helps to identify underlying trends. Additionally, this measure helps compare our performance on a consistent basis across time periods. Management also utilizes EBITDA as a performance measure internally. To obtain a complete understanding of our performance, this measure should be examined in connection with net income determined in accordance with GAAP. Since the items excluded from this measure should be examined in connection with net income in determining financial performance under GAAP, this measure should not be considered an alternative to net income as a measure of our operating performance or profitability. Exclusion of items in our non-GAAP presentation should not be construed as an inference that these items are unusual, infrequent or non-recurring. Other companies, including other companies in the education industry, may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure across companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.
EBITDA reconciles to net income, (loss), as follows (in thousands):
| | | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | | Three Months Ended March 31, | | Six Months Ended March 31, |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | | $ | 10,142 | | | $ | (5,263) | | | $ | 14,826 | | | $ | (12,980) | | |
Net (loss) income | | Net (loss) income | | $ | (1,547) | | | $ | 10,142 | | | $ | (464) | | | $ | 14,826 | |
Interest income | Interest income | | (347) | | | (392) | | | (683) | | | (795) | | Interest income | | (8) | | | (347) | | | (62) | | | (683) | |
Interest expense | Interest expense | | 3 | | | 808 | | | 3 | | | 1,622 | | Interest expense | | 1 | | | 3 | | | 3 | | | 3 | |
Income tax (benefit) expense | | (10,804) | | | 89 | | | (10,720) | | | 222 | | |
Income tax benefit | | Income tax benefit | | (34) | | | (10,804) | | | (8) | | | (10,720) | |
Depreciation and amortization (1) | Depreciation and amortization (1) | | 3,230 | | | 4,439 | | | 6,572 | | | 8,697 | | Depreciation and amortization(1) | | 3,569 | | | 3,230 | | | 6,851 | | | 6,572 | |
EBITDA | EBITDA | | $ | 2,224 | | | $ | (319) | | | $ | 9,998 | | | $ | (3,234) | | EBITDA | | $ | 1,981 | | | $ | 2,224 | | | $ | 6,320 | | | $ | 9,998 | |
(1) Includes depreciation of training equipment obtained in exchange for services of $0.3 million and $0.4 million for the three months ended March 31, 2021 and 2020 and 2019, respectively,$0.6 million and $0.7 million for the six months ended March 31, 20202021 and 2019,2020, respectively.
Liquidity and Capital Resources
Based on past performance and current expectations, we believe that our cash flows from operations, cash on hand and investments will satisfy our working capital needs, capital expenditures, commitments and other liquidity requirements associated with our existing operations, as well as the expansion of programs at existing campusesannounced growth and diversification initiatives through the next 12 months. Our cash position is available to fund strategic long-term growth initiatives, including opening additional metro campuses in new markets and the creation of new programs, such as welding, in existing markets with under-utilized campus facilities. We have no bank debt
Our aggregate cash and cash equivalents were $59.0 million as of March 31, 2021, a decrease of $17.8 million from September 30, 2020. Additionally, we had short-term held-to-maturity investments of $19.5 million and $38.1 million as of March 31, 2021 and September 30, 2020, respectively. We had no long-term debt outstanding as of March 31, 2021 or September 30, 2020.
We believe that additional strategic use of our cash resources may include subsidizing funding alternatives for our students, the repurchase of common stock, purchase of real estate assets, consideration of strategic acquisitions, and other potential uses of cash. To the extent that potential acquisitions are large enough to require financing beyond cash from operations, cash and cash equivalents, and short-term investments, or we need capital to fund operations, new campus openings or expansion of programs at existing campuses, we may enter into a credit facility, issue debt or issue additional equity. Our aggregate cash and cash equivalents
were $76.6 million as of March 31, 2020, an increase of $11.2 million from September 30, 2019. Additionally, we had short-term held-to-maturity investments of $41.5 million as of March 31, 2020. There were no held-to-maturity investments as of March 31, 2019.
As previously noted, we purchased our Avondale, Arizona campus at the end of December 2020, for approximately $45.2 million, including closing costs and other fees. Due to the timing of the close for the Avondale building, we used available operating cash for the purchase. We continue to explore potential financing opportunities for the Avondale, Arizona campus to increase available capital.
On February 20, 2020,
Additionally, on March 29, 2021, we entered into
an Underwriting Agreement with B. Riley FBR, Inc., as representative of the several underwriters named therein,a definitive agreement to
issue and sell an aggregate of 6,782,610 shares (the “Firm Shares”) of our common stock, par value $0.0001 per share,acquire MIAT from HCP & Company for a purchase price not to exceed $26.0 million in
a public offering, at a pricecash, subject to
the public of $7.75 per share, pursuantcertain adjustments. The closing is subject to
a registration statement on Form S-3 (Registration No. 333-236146) and the accompanying prospectus,customary closing conditions, including the related prospectus supplement, filed with the SEC (the “Offering”). The Offeringreceipt of the Firm Shares closed on February 25, 2020. The net proceedsa Pre-Acquisition Review Response from the Offering were approximately $49.5 million, after deducting underwriting discounts. We invested a portionUnited States Department of the proceeds from the equity offering in held-to-maturity securities, which primarily consistEducation that does not contain certain letter of corporate bonds from large cap industrialcredit requirements or operational restrictions and selected financial companies with a minimum credit rating of A.ACCSC approvals. We intend to use cash on hand to pay the proceeds for working capital, capital expenditures, and other general corporate purposes, which may includeconsideration contemplated under the addition of new campuses, the expansion of existing programs and the development of new programs, and the purchase of real property and campus infrastructure. We may also use a portion of the net proceeds to fund potential strategic acquisitions of complementary businesses, assets, services or technologies. See Note 15 in the notes to the condensed consolidated financial statements for further discussion on the Offering.definitive agreement.
On June 9, 2016, our Board of Directors voted to eliminate the quarterlyWe currently do not pay a cash dividend on our common stock. On June 24, 2016, we issued 700,000 shares of Series A Preferred Stock for a total purchase price of $70.0 million. The proceeds from the offering were primarily used to fund strategic initiatives to drive growth, including the transformation plan, expansion to new markets with metro campuses and the creation of new programs in existing markets with under-utilized campus facilities. We paid a preferred stock cash dividends of $5.3 million during the year ended September 30, 2019 and $2.6 million during the six months ended March 31, 2020.2021.
Our principal source of liquidity is operating cash flows and existing cash and cash equivalents. A majority of our revenues are derived from Title IV Programs and various veterans benefits programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for new funding for each academic year consisting of 30-week periods. Loan funds are generally provided in two disbursements for each academic year. The first disbursement for first-time borrowers is usually received 30 days after the start of a student’s academic year, and the second disbursement is typically received at the beginning of the 16th week from the start of the student’s academic year. Under our proprietary loan program, we bear all credit and collection risk and students are not required to begin repayment until six months after the student completes or withdraws from his or her program. These factors, together with the timing of when our students begin their programs, affect our operating cash flow.
On March 19,During the year ended September 30, 2020, due to the COVID-19 pandemic, we suspended all in person classes attransitioned our 13 campuses nationwide for the safetyon-campus, in-person education model to a blended training model that combines instructor-facilitated online teaching and protectiondemonstrations with hands-on labs. All of our students and staff, to help slowcampuses have remained open during the spreadfirst six months of COVID-19, and to comply with state and local orders and restrictions, and transitioned our training programs online. As our training isfiscal 2021. If a combination of classroom lecture and hands-on labs, there is a portion of most classes that cannot be delivered online and needs to be completed in the campus lab. While we currently believe that most students will still be able to complete their programs within the normal timeframe, we cannot predict with certainty how long each campus will remain closed as a result of COVID-19. The prolonged closure of a campus could impact the abilitysignificant number of students at that campus to progress through andtake a leave of absence, withdraw, or do not make-up the required in-person lab work on a timely graduate from their program. This could impactbasis, our cash generated from operations for the remainder of 2020.could be impacted in fiscal 2021.
Operating Activities
Our net cash provided by operating activities was $10.9$17.5 million and $2.8$10.9 million for the six months ended March 31, 2021 and 2020, respectively.
Net loss, after adjustments for non-cash items, provided cash of $16.7 million. The non-cash items included $8.1 million for amortization of right-of-use assets for operating leases, $6.9 million for depreciation and 2019, respectively.amortization expense and $1.8 million for stock-based compensation expense.
Changes in operating assets and liabilities provided cash of $0.8 million primarily due to the following:
•The decrease in receivables provided cash of $12.3 million and was primarily due to the timing of Title IV disbursements and other cash receipts on behalf of our students.
•The decrease in income tax receivable provided cash of $2.7 million and was primarily attributable to receiving an income tax refund as a result of the CARES Act.
•Changes in our operating lease liability as a result of rent payments used cash of $9.2 million.
•The increase in prepaid expenses used cash of $3.0 million primarily due to prepayments for insurance and rent.
•The decrease in accounts payable and accrued expenses used cash of $1.5 million primarily related to the timing of payments to vendors and for payroll and bonus.
Net income, after adjustments for non-cash items, for the six months ended March 31, 2020 provided cash of $35.1 million. The non-cash items included $11.8 million for amortization of right-of-use assets for operating leases, $5.9 million for depreciation and amortization expense and $1.0 million for stock basedstock-based compensation expense.
Changes in operating assets and liabilities used cash of $24.2 million primarily due to the following:
•ChangesThe decrease in our operatingthe lease liability asresulted in a result of rent payments used cash outflow of $12.7 million.million for rent payments.
•The increase in the income taxes receivable used cash of $10.9 million and was primarily attributable to recording an income tax receivable of $11.3 million as a result of the CARES Act, which allowed us to carryback NOLs from 2019 and 2018.Act.
•The decrease in deferred revenue used cash of $6.1 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at March 31, 2020 as compared to September 30, 2019.
•The decrease in other liabilities used cash of $1.6 million due to timing of payments for incentive compensation.
•The increase in accounts payable and accrued expenses provided cash of $4.8 million primarily related to the timing of payments for payroll and bonuses.
•The decrease in receivable provided cash of $3.1 million and was primarily due to the timing of Title IV disbursements and other cash receipts on behalf of our students.students..
Net loss, after adjustments for non-cash items, forInvesting Activities
During the six months ended March 31, 20192021, cash used cash of $2.7in investing activities was $31.6 million. The non-cash items included $6.6 million for depreciation and amortization expense, $1.3 million for amortization of assets subject to financing obligations and $1.3 million for stock-based compensation expense.
Changes in operating assets and liabilities provided cash of $5.5 million primarily due to the following:
•The decrease in receivables provided cash of $9.7 million andoutflow was primarily attributable to the timing of Title IV disbursements and other cash receipts on behalf of our students.
•The increase in deferred revenue used cash of $1.8 million and was primarily attributable to the timing of student starts, the number of students in school and where they were at period end in relation to completion of their program at March 31, 2019 as compared to September 30, 2018.
•The decrease in accounts payable and accrued expenses used cash of $2.2 million primarily related to the timingpurchase of payments.
•The decrease in deferred rent used cashproperty and equipment of $1.7$49.9 million, due to the change in amortization of the deferred rent balancewhich $45.2 million related to the Norwood, Massachusettspurchase of the building at our Avondale, Arizona campus exit. Deferred rent also decreased due to normal amortizationlocation, partially offset by proceeds from maturities of our Orlando, Florida and home office leases.
Investing Activitiesheld-to-maturity securities of $18.2 million.
During the six months ended March 31, 2020, cash used in investing activities was $46.6 million. The cash outflow was primarily related to the purchase of held-to-maturity investments with a portion of the proceeds received from thea public offering of our common stock in February Offering.2020.
Financing Activities
During the six months ended March 31, 2019,2021, cash used in investingfinancing activities was $4.6$3.1 million and related primarily to the purchasepayment of propertypayroll taxes on stock-based compensation through shares withheld and equipment, primarily for our Dallas/Ft. Worth, Texas campus for welding, and new and replacement training equipment for ongoing operations and consolidation efforts at our Houston, Texas campus.
Financing Activitiesthe semi-annual payment of preferred stock dividends of $2.6 million.
During the six months ended March 31, 2020, cash provided by financing activities was $45.9 million and related primarily to the net proceeds received from the public offering of our common stock in February Offering,2020, offset by our semi-annual payment of preferred stock dividends of $2.6 million on March 27, 2020.
During the six months ended March 31, 2019, cash used in financing activities was $3.4 million and related primarily to the semi-annual payment of preferred stock dividends of $2.6 million on March 28, 2019, in addition to payments on our financing obligations of $0.6 million.
Seasonality and Trends
Our operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population and costs associated with opening or expanding our campuses. Our student population varies as a result of new student enrollments, graduations and student attrition. Historically, we have had lower student populations in our third quarter than in the remainder of our year because fewer students are enrolled during the summer months. Additionally, we have had higher student populations in our fourth quarter than in the remainder of the year because more students enroll during this period. Our expenses, however, do not vary significantly with changes in student population and revenues, and, as a result, such expenses do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. However, such patterns may change as a result of new school openings, new program introductions, increased enrollments of adult students or acquisitions.
The transition of the classroom portion of our on-campus, in-person education model to a blended training programsmodel that combines online, instructor-delivered teaching and demonstrations with hands-on labs as a result of campus closures related tothe COVID-19 pandemic could impact our future new student enrollments, graduations and student attrition.
Critical Accounting Policies and Estimates
There were no significant changes in our critical accounting policies in the six months ended March 31, 20202021 from those previously disclosed in Part II, Item 7 of our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019, except as disclosed in Note 3, in the notes to the condensed consolidated financial statements herein.2020.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 3 of the notes to the condensed consolidated financial statements herein.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk since September 30, 2019.2020. For a discussion of our exposure to market risk, refer to our 20192020 Annual Report on Form 10-K, filed with the SEC on December 6, 2019.3, 2020.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 20202021 were effective in ensuring that (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) or 15d-15(d) that occurred during the three months ended March 31, 2020, except for new internal controls related to ASC 842 that have been implemented, including internal controls related to a new enterprise-wide lease accounting system, as well as modified internal controls related to the collection, recording and accounting for leases in accordance with ASC 842.2021.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks that internal controls
may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we are periodically subject to lawsuits, demands in arbitrations, investigations, regulatory proceedings or other claims, including, but not limited to, claims involving current and former students, routine employment matters, business disputes and regulatory demands. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we would accrue a liability for the loss. When a loss is not both probable and estimable, we do not accrue a liability. Where a loss is not probable but is reasonably possible, including if a loss in excess of an accrued liability is reasonably possible, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim. Because we cannot predict with certainty the ultimate resolution of the legal proceedings (including lawsuits, investigations, regulatory proceedings or claims) asserted against us, it is not currently possible to provide such an estimate. The ultimate outcome of pending legal proceedings to which we are a party may have a material adverse effect on our business, cash flows, results of operations or financial condition.
Item 1A. RISK FACTORS
In addition to the risk factors below and other information set forth in this Quarterly Report on Form 10-Q, including the information contained in Part I, Item 3, you should carefully consider the factors discussed in Part I, Item IA of our 20192020 Annual Report on Form 10-K filed with the SEC on December 6, 2019,3, 2020, which could materially affect our business, financial condition or operating results. The risks described in this Quarterly Report on Form 10-Q and in our 20192020 Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.
Risks Related to Our Business
Public health pandemics, epidemics or outbreaks could have a material adverse effect on our business and operations.
In December 2019, a novel strain of coronavirus, COVID-19, emerged in Wuhan, China. While initially concentrated in China, the outbreak has spread to other countries and infections have been reported globally, including in the United States. The World Health Organization has declared the outbreak to be a pandemic, the United States declared a state of national emergency, and many state and local governments are also taking various actions to combat the spread of COVID-19. The extent to which COVID-19, like any other rapidly spreading contagious illness, may impact our business and operations will depend on the evolution of the outbreak, which is highly speculative at this time and cannot be predicted with any level of certainty. The duration of the outbreak, new information which emerges concerning the severity of the illness and the actions to be taken to contain the spread of COVID-19 or its treatment remains unclear. We believe that the continued spread of COVID-19 could adversely impact our business and operations. In this regard, all of the states in which we operate are enforcing closures of educational institutions, including our campuses. In addition, a quarantine of one or more of our faculty members for two or more weeks due to exposure to the coronavirus or other contagious illness could eliminate a program unless a substitute was readily available, and quarantine of a faculty member or student could cause the temporary closure of an affected campus, which could have an adverse impact on our business and our financial results. Further, workforce limitations and travel restrictions resulting from pandemics or disease outbreaks and related government actions may impact many aspects of our business. If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations and enrollment may be negatively impacted. Finally, state and federal regulators, including the U.S. Department of Education, are augmenting existing regulatory processes, waiving others and overseeing various emergency relief and aid programs.It is highly uncertain how long such regulatory accommodations will continue, or how long and in what amount emergency relief and aid funds will continue to be available.We also cannot predict the types of conditions that may be attached to participation in emergency relief and aid programs, and whether and to what extent compliance with such conditions will be monitored and enforced.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchase ProgramNone.
On December 20, 2011, our Board of Directors authorized the repurchase of up to $25.0 million of our common stock in the open market or through privately negotiated transactions. As of March 31, 2020, we have purchased an aggregate of 1,677,570 shares of our common stock for an aggregate purchase price of $15.3 million under this stock repurchase program. During the three months ended March 31, 2020, we made no purchases under this stock repurchase program. Any future repurchases under this stock repurchase program require the approval of a majority of the voting power of the Series A Preferred Stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
The following table summarizes our share repurchases to settle individual employee tax liabilities. These are not included in the repurchase plan totals as they were approved in conjunction with restricted share awards, during each period in the three months ended March 31, 2020. Shares from share repurchases in lieu of taxes are returned to the pool of shares issuable under our 2003 Incentive Compensation Plan.
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ISSUER PURCHASES OF EQUITY SECURITIES | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans Or Programs (In thousands) |
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Tax Withholdings | | | | | | | | |
January 1, 2020 to January 30, 2020 | | — | | | $ | — | | | — | | | $ | — | |
February 1, 2020 to February 29, 2020 | | 4,077 | | | $ | 7.31 | | | — | | | $ | — | |
March 1, 2020 to March 31, 2020 | | — | | | $ | — | | | — | | | $ | — | |
Total | | 4,077 | | | $ | 7.31 | | | — | | | $ | — | |
None.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The following exhibits required by Item 601 of Regulation S-K are filed or furnished with this report, as applicable:
| | | | | | | | |
Exhibit Number | | Description |
1.12.1*# | | |
3.1* | | |
3.2* | | |
10.1 | | |
31.1* | | |
31.2* | | |
32.1*32.1+ | | |
32.2*32.2+ | | |
101.INS* | | XBRL Instance Document. |
101.SCH* | | XBRL Taxonomy Extension Schema Document. |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
__________________
*Filed herewith.
+ Furnished herewith.
# Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | UNIVERSAL TECHNICAL INSTITUTE, INC. | | |
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Date: | May 8, 20207, 2021 | | By: | | /s/ Jerome A. Grant |
| | | Name: | | Jerome A. Grant |
| | | Title: | | Chief Executive Officer (Principal Executive Officer) |