2016 Annual Report
Headquartered in Scottsdale, Arizona, Universal Technical Institute, Inc.
(NYSE: UTI) is the leading provider of post-secondary education for students
seeking careers as professional automotive, diesel, collision repair,
motorcycle and marine technicians. With more than 200,000 graduates in its
51-year history, UTI offers undergraduate degree and diploma programs at 12 campus locations across the
United States, as well as manufacturer-specific training programs at dedicated training centers. UTI provides
specialized post-secondary education programs under the banner of several well-known brands, including
Universal Technical Institute (UTI), Motorcycle Mechanics Institute and Marine Mechanics Institute (MMI) and
NASCAR Technical Institute (NASCAR Tech).
A message to our shareholders
2016 was an important year for Universal
As we refined our long-term growth strategy,
Technical Institute as we positioned the
we secured the capital to accelerate
company for success in an environment that
our proven initiatives. In the coming year,
requires change, but also creates opportunity.
we’ll ramp up work to open our smaller
We took meaningful steps to align our team
and cost structure with the realities of the
current market, and we strengthened our
commuter-friendly campuses in attractive
markets and roll out new programs that
make use of our existing footprint.
foundation for the future.
The industry demand for what we do is
There is strong demand for our graduates
and incremental value for every student we
train, so we are keenly focused on attracting
more qualified students, and on helping
them start school, succeed in school and
undeniable. In 2016, we put this company
on the path to help more students find
success and to produce more of the skilled
technicians our industry and country so
desperately need.
go on to build rewarding careers.
Sincerely,
Kim McWaters
Chairman & Chief Executive Officer
__________________________________________________________________________________________
__________________________________________________________________________________________
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
_____________________________________________
Commission File Number 1-31923
_____________________________________________
UNIVERSAL TECHNICAL INSTITUTE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
86-0226984
(IRS Employer Identification
No.)
16220 North Scottsdale Road, Suite 100
Scottsdale, Arizona 85254
(Address of principal executive offices)
(623) 445-9500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $0.0001 par value
Name of each exchange on which registered:
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,”
and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
No
At November 21, 2016, 24,624,434 shares of common stock were outstanding. The aggregate market
value of the shares of common stock held by non-affiliates of the registrant on the last business day of the registrant's
most recently completed second fiscal quarter (March 31, 2016) was approximately $91,700,000 (based upon the
closing price of the common stock on such date as reported by the New York Stock Exchange). For purposes of
this calculation, the registrant has excluded the market value of all common stock beneficially owned by all executive
officers and directors of the registrant.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the 2017 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
PART I
Page
Special Note Regarding Forward-Looking Statements
ITEM 1.
BUSINESS
Overview
Business Model
Business Strategy
Industry Background
Schools and Programs
Industry Relationships
Student Recruitment Model
Student Admissions and Retention
Enrollment
Graduate Employment
Faculty and Employees
Competition
Environmental Matters
Available Information
Regulatory Environment
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
ITEM 4.
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
EXECUTIVE OFFICERS OF UNIVERSAL TECHNICAL INSTITUTE, INC
ITEM 5.
ITEM 6.
ITEM 7.
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General Overview
2016 Overview
Results of Operations
Liquidity and Capital Resources
Contractual Obligations
Off-Balance Sheet Arrangements
Related Party Transactions
Seasonality
Critical Accounting Estimates
Recent Accounting Pronouncements
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
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PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page
96
96
96
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96
97
ii
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K and the documents incorporated by reference herein contain
forward-looking statements within the meaning of 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. 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 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; 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, strategies 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. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,”
“potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,”
“estimates,” and similar expressions, as well as statements in future tense, identify forward-looking
statements. However, not all forward-looking statements contain these identifying words.
We cannot guarantee that any forward-looking statement will be realized, although we believe
we have been prudent in our plans and assumptions. 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 1A, "Risk Factors". You should
bear this in mind as you consider forward-looking statements.
Except as required by law, we undertake no obligation to publicly update or revise forward-
looking statements, whether as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in our Form 10-Q and 8-K
reports to the Securities and Exchange Commission (SEC).
1
ITEM 1. BUSINESS
Overview
PART I
We are the leading provider of postsecondary education for students seeking careers as professional
automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average undergraduate
full-time enrollment and graduates. We offer undergraduate degree or diploma programs at 12 campuses across
the United States under the banner of several well-known brands, including Universal Technical Institute (UTI),
Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI) and NASCAR Technical
Institute (NASCAR Tech). We also offer manufacturer specific advanced training programs, including student-
paid electives, at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated
training centers. We have provided technical education for 51 years.
For the year ended September 30, 2016, our average undergraduate full-time student enrollment was
approximately 12,000.
Business Model
We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel,
motorcycle and marine industries to understand their needs for qualified service professionals. Through our
relationships with OEMs, we are able to continuously refine and expand our programs and curricula. We believe
our industry-oriented educational philosophy and national presence have enabled us to develop valuable industry
relationships, which provide us with significant competitive strength and support our market leadership.
We are a primary, and often the sole, provider of manufacturer specific advanced training (MSAT)
programs, and we have relationships with over 30 OEMs, including the following, and their associated brands:
American Honda Motor Co., Inc.
BMW of North America, LLC
BMW Motorrad of North America, LLC
Bombardier Produits Recreatifs (BRP), Inc.
Cummins Rocky Mountain, a subsidiary of Cummins,
Inc.
Mercedes-Benz USA, LLC
Mercury Marine, a division of Brunswick Corp.
Navistar International Corp.
Nissan North America, Inc.
Peterbilt Motors Company
Daimler Trucks N.A.
Porsche Cars of North America, Inc.
FCA US LLC (fka Chrysler Group LLC)
Suzuki Motor of America, Inc.
Ford Motor Co.
General Motors Co.
Harley-Davidson Motor Co.
Kawasaki Motors Corp., U.S.A.
KTM of North America, Inc.
Toyota Motor Sales, U.S.A., Inc.
Volvo Cars of North America, LLC
Volvo Penta of the Americas, Inc.
Yamaha Motor Corp., USA
Participating manufacturers typically assist us in the development of course content and curricula, while
providing us 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 enables
us to provide highly specialized education to our students, resulting in enhanced employment opportunities and
the potential for higher wages for our graduates.
2
Our industry partners and their dealers benefit from a supply of technicians who are certified or credentialed
by the manufacturer 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 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.
Business Strategy
Our goal is to continue to be the leading provider of post-secondary education for students seeking careers
as professional automotive, diesel, collision repair, motorcycle and marine technicians and the leading supplier of
entry-level skilled technicians for the industries we serve. We intend to pursue the following business strategies
to attain this goal:
Strengthen industry relationships
Our relationships with leading OEMs are important to our business. We strive to understand the workforce
needs of our existing OEM partners to provide the quantity and quality of technicians when and where they are
needed. We have a dedicated account management team at our corporate level focused on managing those
relationships and developing new ones. We deliver value to these OEMs by functioning as an efficient hiring
source and low cost training option. These relationships give us direct input on the latest needs and requirements
of employers, which not only guides our prospective student recruitment, but also strengthens our curricula and
our students’ opportunities for employment and earnings potential after graduation. In addition, our OEM partners
and their related dealers support our students through manufacturer-paid courses, scholarships and tuition
reimbursement programs. In the future, we may be more selective about which OEMs we choose to partner with.
This may lead to the cancellation of relationships that do not result in the best outcomes for our students after
graduation.
Recruit, train and identify employment opportunities for more students
Our student recruitment efforts are focused on three primary markets for prospective students and are
conducted through three admissions channels:
High School: Field-based representatives develop and maintain relationships with high school guidance
counselors and vocational instructors as well as students and parents.
Adult: Campus-based representatives serve adult career-seeking or career changing students via inbound
and outbound media.
Military: Our military representatives are strategically located throughout the country and focus on
building relationships with and serving the needs of transitioning soldiers and military veterans. Additionally, we
have a centralized team of military representatives who are dedicated to serving and assisting veterans throughout
the U.S.
We collaborate with employers to help prospective students and their families understand the potential
career opportunities that may be available after completing one of our programs. As competition for the graduates
we train grows, employers are increasingly partnering with us to raise awareness of the benefits of a technician
career path for prospective students. Employer testimonials are featured in our marketing materials. Additionally,
3
employers host special events for our prospective students at their locations and participate in open houses at our
campuses, highlighting the high-tech jobs and career opportunities available to our graduates.
Our national multi-media marketing strategies are designed to drive new student growth by building brand
awareness and differentiation and generating inquiries from qualified prospective students.
We continue to optimize our national and local marketing initiatives, tools and systems with the goals of
cost-effectively achieving the optimal balance between generating a strong volume of inquiries from adult students
and maximizing the percentage of inquiries from students with a high propensity to attend our programs.
Partnering with employers and focusing on our marketing strategies is part of an effort to increase positive
perception of technical careers and our programs. We are working to build relationships on military bases, in high
schools, with local and state businesses and education and policy leaders to educate them on the value we create
for our students, local employers, the economy and the community.
We have implemented new processes, technology and tools to support our national network of admissions
representatives in responding to new student inquiries and keeping them engaged as they apply for, enroll in and
start school. We have begun the process of providing incentive-based compensation for our admissions
representatives, which will reward them for students who successfully complete our programs.
Improve educational value proposition and affordability
Educational value
Our strategy is to provide students with an excellent return on their educational investment by offering
training that is not typically available through other providers, is tailored to industry standards and requirements,
improves students’ opportunities to find employment and maximizes their earnings potential in a secure, growing
industry.
We actively engage transportation industry partners in defining our core curriculum and improving and
expanding MSAT courses. We regularly evaluate program offerings, schedules and locations that are most appealing
to students and aligned with employer expectations, and update and expand our core and MSAT courses to align
our training programs with current industry requirements.
Our Automotive and Diesel Technology II curricula is designed around manufacturers’ needs and fulfills
student demand for hands-on, instructor led training combined with flexible, web-based learning. We intend to
continue integrating the new curricula and methodologies at new and existing campuses that offer Automotive and
Diesel Technology programs. We will prioritize implementation of the Automotive and Diesel Technology II
curricula at new campus locations.
These unique course offerings make our students more valuable to employers by giving them training
that is consistent with industry needs and rapidly changing technology and the opportunity to earn certain industry-
recognized certifications and credentials that are not readily available elsewhere. As a result, we believe we are
well positioned to better meet the industry’s demand for trained technicians.
We provide relevant services to assist students with possible tuition financing options, educational and
career counseling, opportunities while attending school for part-time work and housing assistance and, ultimately,
graduate employment. Our national employment services team develops job opportunities and outreach, while our
local employment services teams instruct active students on employment search and interviewing skills, facilitate
employer visits to campuses, provide access to reference materials and assist with the composition of resumes.
4
Affordability
Increased price sensitivity and aversion to debt continue to negatively impact prospective students’
willingness and ability to fund an education. We are focused on making our training more affordable and accessible
through financing options, proprietary loans, scholarships based on need and merit as well as financing tools and
guidance for students.
In response to growing demand for trained technicians, our industry partners and employers are
increasingly willing to provide our students with scholarship money and to offer our graduates tuition
reimbursement plans and competitive compensation and benefit packages, including signing bonuses, relocation
grants and toolboxes. These programs make our training more affordable for students and provide tangible examples
of the opportunities available to our graduates.
We are working with high schools across the nation to increase course articulation programs, which allow
students who have completed courses accredited by the National Automotive Technical Education Foundation
(NATEF), a division of the Institute for Automotive Service Excellence (ASE), to transfer these credits to our
programs. These additional credits can reduce students’ tuition and the time needed to complete our programs.
Additionally, we regularly review and revise key business processes with the goals of eliminating costs
and waste, driving efficiency and allowing us to continue to improve value and affordability for our students. Our
goal is to align costs with student populations without compromising the quality of our education.
Invest in strategies to drive profitable growth
We are pursuing strategies designed to drive profitable growth and have secured the capital necessary to
execute these initiatives, while meeting the requirements and expectations of regulators and our accreditor.
Through organic growth and, potentially, strategic acquisition of campus locations, we are expanding our
national footprint by adding smaller campuses in locations where there is strong demand from students and
employers. Additionally, we plan to better utilize our existing campuses by offering OEM courses and
complementary skilled trade programs such as welding and CNC machining.
We are also working to create more diversified revenue streams that build on our expertise in developing
training programs for hands-on technical applications. Through strategic acquisition, we are building the capability
to develop and deliver digital training and continuing education solutions for a variety of domestic and international
companies.
Industry Background
The market for qualified service technicians is large and growing. In the most recent data available, the
United States Department of Labor (U.S. DOL) estimated that in 2014 there were approximately 739,900 employed
automotive technicians in the United States, and this number was expected to increase by 5.3% from 2014 to 2024.
Other 2014 estimates provided by the U.S. DOL indicate that the number of technicians in the other industries we
serve, including diesel, collision, motorcycle and marine repair, are expected to increase over this ten-year period
by 12.0%, 9.2%, 5.9% and 2.7%, respectively. The need for technicians is due to a variety of factors, including
technological advancement in the industries into which our graduates enter, a continued increase in the number of
automobiles, trucks, motorcycles and boats in service, the increasing lifespan of late-model automobiles and light
trucks and an aging workforce that has begun to retire. As a result of these factors, the U.S. DOL estimates that an
average of approximately 37,200 new job openings will exist annually for new entrants from 2014 to 2024 in the
fields that we serve, according to data we reviewed. In addition to the increase in demand for newly qualified
technicians, manufacturers, dealer networks, transportation companies and governmental entities with large fleets
5
are outsourcing their training functions, seeking preferred education providers who can offer high quality curricula
and have a national presence to meet the employment and advanced training needs of their national dealer networks.
Schools and Programs
Through our campus-based school system, we offer specialized technical education programs under the
banner of several well-known brands, including Universal Technical Institute (UTI), Motorcycle Mechanics
Institute and Marine Mechanics Institute (collectively, MMI) and NASCAR Technical Institute (NASCAR Tech).
The majority of our undergraduate programs are designed to be completed in 45 to 102 weeks and culminate in
an associate of occupational studies degree or diploma, depending on the program and campus. Tuition ranges
from approximately $21,700 to $59,600 per program, depending on the nature and length of the program. Our
campuses are accredited and our undergraduate programs are eligible for federal student financial assistance funds
under the Higher Education Act of 1965, as amended (HEA), commonly referred to as Title IV Programs, which
are administered by the U.S. Department of Education (ED). Our programs are also eligible for financial aid from
federal sources other than Title IV Programs, such as the programs administered by the U.S. Department of Veterans
Affairs (VA) and under the Workforce Investment Act.
Our undergraduate schools and programs are summarized in the following table:
Location
Arizona (Avondale)*
Arizona (Phoenix)
California (Long Beach)*
California (Rancho Cucamonga)
California (Sacramento)*
Brand
UTI
MMI
UTI
UTI
UTI
Florida (Orlando)*
UTI/MMI
Illinois (Lisle)
Massachusetts (Norwood)
UTI
UTI
North Carolina (Mooresville)
NASCAR Tech
Pennsylvania (Exton)
Texas (Dallas/Ft. Worth)*
Texas (Houston)
UTI
UTI
UTI
Date
Training
Commenced
1965
Principal Programs
Automotive; Diesel & Industrial
1973
2015
1998
2005
1986
1988
2005
2002
2004
2010
1983
Motorcycle
Automotive; Diesel & Industrial;
Collision Repair and Refinishing
Automotive; Diesel & Industrial
Automotive; Diesel & Industrial;
Collision Repair and Refinishing
Automotive; Diesel & Industrial;
Motorcycle; Marine
Automotive; Diesel & Industrial
Automotive; Diesel & Industrial
Automotive; Automotive with
NASCAR
Automotive; Diesel & Industrial
Automotive; Diesel & Industrial
Automotive; Diesel & Industrial;
Collision Repair and Refinishing
* Indicates a campus location that offers our Automotive Technology and Diesel Technology II curricula. We plan
to offer this curricula at our Rancho Cucamonga, California campus in 2017.
6
Universal Technical Institute (UTI)
UTI offers automotive, diesel and industrial, and collision repair and refinishing programs that are
accredited by NATEF, a division of ASE. In order to apply for NATEF accreditation, a school must meet the
NATEF curriculum requirements and also must have graduated its first class. We offer both diploma and associate
degree level programs, with degree level credentials currently only offered at our Avondale, Arizona location. We
plan to expand degree level offerings to select existing and new campus locations, subject to applicable regulatory
approvals. We offer the following programs under the UTI brand:
• Automotive Technology. Established in 1965, the Automotive Technology program is designed to
teach students how to diagnose, service and repair automobiles. In 2010, we began offering this
program as Automotive Technology II in a blended learning format which combines daily instructor-
led theory and hands-on lab training complimented by interactive web-based learning. Automotive
Technology II is currently offered at our Avondale, Arizona; Long Beach, California; Sacramento,
California; Orlando, Florida and Dallas/Ft. Worth, Texas campuses. The program ranges from 51
to 68 weeks in duration and tuition ranges from approximately $32,500 to $43,450. Graduates of
this program are qualified to work as entry-level service technicians in automotive dealer service
departments or automotive repair facilities.
• Diesel & Industrial Technology. Established in 1968, the Diesel & Industrial Technology program
is designed to teach students how to diagnose, service and repair diesel systems and industrial
equipment. In 2010, we began offering this program as Diesel Technology II in the blended learning
format described above. Diesel Technology II is currently offered at our Avondale, Arizona; Long
Beach, California; Sacramento, California; Orlando, Florida and Dallas/Ft. Worth, Texas campuses.
The program is 45 to 60 weeks in duration and tuition ranges from approximately $30,250 to $38,500.
Graduates of this program are qualified to work as entry-level service technicians in medium and
heavy truck facilities, truck dealerships, or in service and repair facilities for equipment utilized in
various industrial applications, including materials handling, construction, transport refrigeration or
farming.
• Automotive and Diesel Technology. Established in 1970, the Automotive/Diesel Technology
program is designed to teach students how to diagnose, service and repair automobiles and diesel
systems. In 2010, we began offering this program as Automotive and Diesel Technology II in the
blended learning format described above; Automotive and Diesel Technology II is currently offered
at our Avondale, Arizona; Long Beach, California; Sacramento, California; Orlando, Florida and
Dallas/Ft. Worth, Texas campuses. The program ranges from 75 to 102 weeks in duration and tuition
ranges from approximately $43,950 to $59,600. Graduates of this program are qualified to work as
entry-level service technicians in automotive repair facilities, automotive dealer service departments,
diesel engine repair facilities, medium and heavy truck facilities or truck dealerships.
• Automotive/Diesel & Industrial Technology. Established in 1970, the Automotive/Diesel &
Industrial Technology program is designed to teach students how to diagnose, service and repair
automobiles, diesel systems and industrial equipment. The program ranges from 75 to 100 weeks in
duration and tuition ranges from approximately $41,350 to $52,900. Graduates of this program are
qualified to work as entry-level service technicians in automotive repair facilities, automotive dealer
service departments, diesel engine repair facilities, medium and heavy truck facilities, truck
dealerships, or in service and repair facilities for marine diesel engines and equipment utilized in
various industrial applications, including materials handling, construction, transport refrigeration or
farming.
• Collision Repair and Refinishing Technology (CRRT). Established in 1999, the CRRT program is
designed to teach students how to repair non-structural and structural automobile damage as well as
7
how to prepare cost estimates on all phases of repair and refinishing. The program ranges from 45
to 54 weeks in duration and tuition ranges from approximately$28,650 to $37,300. Graduates of this
program are qualified to work as entry-level technicians at OEM dealerships and independent repair
facilities.
Motorcycle Mechanics Institute and Marine Mechanics Institute (collectively, MMI)
• Motorcycle. Established in 1973, the MMI motorcycle program is designed to teach students how
to diagnose, service and repair motorcycles and all-terrain vehicles. The program ranges from 48 to
102 weeks in duration and tuition ranges from approximately $21,700 to $45,900. Graduates of this
program are qualified to work as entry-level service technicians in motorcycle dealerships and
independent repair facilities. MMI is supported by seven major motorcycle manufacturers, and we
have agreements relating to specific motorcycle training and elective programs with American Honda
Motor Co., Inc.; BMW Motorrad of North America, LLC; Harley-Davidson Motor Co.; Kawasaki
Motors Corp., U.S.A.; Suzuki Motor of America, Inc. and Yamaha Motor Corp., USA. We have
agreements for dealer training with American Honda Motor Co., Inc. and Harley-Davidson Motor
Co. These motorcycle manufacturers support us through their endorsement of our curricula content,
assisting with our course development, providing equipment and product donations and instructor
training. Certain of these agreements are verbal and may be terminated without cause by either party
at any time.
• Marine. Established in 1991, the MMI marine program is designed to teach students how to diagnose,
service and repair boats. The program is 51 weeks in duration and tuition is approximately $27,450.
Graduates of this program are qualified to work as entry-level service technicians for marine
dealerships and independent repair shops, as well as for marinas, boat yards and yacht clubs. MMI
is supported by several marine manufacturers, and we have agreements relating to marine elective
programs with American Honda Motor Co., Inc.; Mercury Marine, a division of Brunswick Corp.;
Suzuki Motor of America, Inc.; Volvo Penta of the Americas, Inc. and Yamaha Motor Corp., USA.
We have agreements for dealer training with American Honda Motor Co. Inc. and Mercury Marine,
a division of Brunswick Corp. These marine manufacturers support us through their endorsement
of our curricula content, assisting with course development, equipment and product donations and
instructor training. Certain of these agreements are verbal and may be terminated without cause by
either party at any time.
Students who complete the MMI marine program can also pursue provisional certification as factory-
certified technicians for Mercury Marine outboard products at no additional cost. Students must
complete core Mercury University requirements, which are an embedded component of the MMI
marine program, and complete online distance-learning courses in order to achieve the provisional
certification. The certification becomes active upon employment with a Mercury Marine dealership
within two years of graduation. MMI is the only career technical education school in the country
with which Mercury Marine is offering this certification program.
NASCAR Technical Institute (NASCAR Tech)
Established in 2002, NASCAR Tech offers the same type of automotive training as other UTI locations,
along with additional NASCAR-specific elective courses. In the NASCAR-specific elective courses, students
have the opportunity to learn first-hand with NASCAR engines and equipment and to acquire specific skills required
for entry-level positions in automotive and racing-related career opportunities. The programs range from 48 to 75
weeks in duration and tuition ranges from $33,750 to $47,050. Graduates of the Automotive Technology program
and the Automotive Technology with NASCAR (the NASCAR program) at NASCAR Tech are qualified to work
as entry-level service technicians in automotive repair facilities or automotive dealer service departments. Graduates
from the NASCAR program have additional opportunities to work in racing-related industries. Of the students
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who elected to take the NASCAR-specific elective courses and graduated during 2015, approximately 15% found
employment opportunities in racing-related industries. The overall employment rate for our NASCAR Tech campus
was 89% for 2015. See "Business - Graduate Employment" included elsewhere in this Report on Form 10-K for
further information on our employment rates.
Upcoming programs
We plan to begin offering two new programs, welding and CNC (computer numeric control) machining,
in 2017. We intend to initially offer our CNC Machining and Manufacturing Technology program in Mooresville,
North Carolina, home to both Roush Yates and our NASCAR Tech campus. The program is designed to prepare
students to produce precision parts used in high-performance engines and a wide variety of trucks, motorcycles,
cars and boats, and also in industrial applications, aerospace components and medical and surgical equipment. Our
Welding Technology program will be initially offered at our Rancho Cucamonga, California campus. The program
is designed to prepare students to work as entry-level welders in the construction, structural, pipe, mechanical
contracting and fabrication industries.
Manufacturer Specific Advanced Training (MSAT) Programs
We offer advanced training programs in the form of manufacturer-paid post-graduate MSAT programs,
and in the form of student-paid MSAT courses which may be added to a student’s core Automotive, Diesel or
Motorcycle undergraduate program.
The manufacturer-paid MSATs are paid for by the manufacturer and/or its dealers in return for a
commitment by the student to work for a dealer of that manufacturer for a certain period of time upon completion
of the program. For both types of programs, the manufacturer typically assists us in the development of course
content and curricula, while providing us with vehicles, equipment, specialty tools and parts at reduced prices or
at no charge. This specialized training enhances the student’s skills with a particular manufacturer’s technology
resulting in enhanced employment opportunities and potential for higher wages for our graduates.
Manufacturer-Paid MSATs
Our manufacturer-paid MSATs are intended to offer in-depth instruction on specific manufacturers’
products, qualifying a graduate for employment with a dealer seeking highly specialized, entry-level technicians
with brand-specific skills. Students who are highly ranked graduates of an automotive or diesel program may
apply to be selected for these programs. The programs range from 11 to 23 weeks in duration. Pursuant to written
agreements, we offer the following manufacturer-paid MSAT programs using vehicles, equipment, specialty tools
and curricula provided by the OEMs:
• BMW of North America, LLC. We provide BMW’s Service Technician Education Program (STEP)
and MINI Service Technical Education Program (MINI STEP). STEP programs are provided at our
Avondale, Arizona and Orlando, Florida campuses and at the BMW training centers in Ontario,
California and Woodcliff Lake, New Jersey. This agreement expires on December 31, 2017 and may
be terminated for cause by either party.
• Mercedes-Benz USA, LLC. We provide the Mercedes-Benz DRIVE Program at the MBUSA training
centers in Jacksonville, Florida and Long Beach, California. This agreement expires on March 31,
2017 and may be terminated without cause by either party. We also deliver this program at our
Norwood, Massachusetts campus. The agreement for this location expires on December 31, 2017.
• Navistar International Corp. We provide the International Truck Education Program at our Lisle,
Illinois and Sacramento, California campuses. This agreement expires December 31, 2016 and may
be renewed annually by mutual agreement.
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• Peterbilt Motors Company. We provide the Peterbilt Technician Institute program at our Dallas/Ft.
Worth, Texas; Exton, Pennsylvania and Lisle, Illinois campuses. This agreement expires on December
31, 2016 and may be terminated without cause by either party.
• Porsche Cars of North America, Inc. We provide the Porsche Technician Apprenticeship Program
at the Porsche training centers in Atlanta, Georgia and Easton, Pennsylvania. This agreement expires
September 30, 2019 and may be renewed by mutual agreement.
• Volvo Cars of North America, LLC. We provide Volvo’s Service Automotive Factory Education
program training at our Avondale, Arizona campus. This agreement expires on December 31, 2016
and may be renewed annually by mutual agreement.
Student-Paid MSATs
Pursuant to written agreements, we offer the following student-paid MSAT programs for the following
OEMs using vehicles, equipment, specialty tools and curricula provided by the OEMs:
• BMW of North America, LLC. We provide BMW’s FastTrack Program at our Avondale, Arizona and
Orlando, Florida campuses.
• Cummins Rocky Mountain, a subsidiary of Cummins, Inc. We provide the Cummins Technician
Qualification Program at our Avondale, Arizona; Exton, Pennsylvania and Houston, Texas campuses.
• Daimler Trucks N.A. We provide the Daimler Trucks Finish First Program at our Avondale, Arizona
and Lisle, Illinois campuses.
• Ford Motor Co. We provide the Ford Accelerated Credential Training Program at all UTI campuses
except our Dallas/Ft. Worth, Texas and Long Beach, California campuses.
• General Motors Company. We provide the GM Technical Career Training Program at our Avondale,
Arizona campus.
• Mercedes-Benz USA, LLC. We provide the Mercedes-Benz ELITE START Program at our Houston,
Texas; Norwood, Massachusetts and Rancho Cucamonga, California campuses. This program has
been discontinued by the manufacturer and the teach out will be completed during the second quarter
of 2017.
• Nissan North America, Inc. We provide the Nissan Automotive Technician Training Program at our
Houston, Texas; Mooresville, North Carolina; Long Beach, California; Orlando, Florida and
Norwood, Massachusetts campuses.
•
Toyota Motor Sales, U.S.A., Inc. We provide the Toyota Professional Automotive Technician Program
at our Lisle, Illinois; Exton, Pennsylvania and Sacramento, California campuses.
Dealer/Industry Training
Technicians in all of the industries we serve are in regular need of training or certification on new
technologies. Manufacturers outsource a portion of this training to education providers such as UTI. Additionally,
certain manufacturers outsource instructor staffing for their own training programs. We currently provide dealer
technician training or instructor staffing services to manufacturers such as the following: American Honda Motor
Co., Inc.; BMW of North America, LLC; Ford Motor Co.; General Motors Company, through Raytheon Professional
Services LLC; Harley-Davidson Motor Co. and Mercury Marine, a division of Brunswick Corporation.
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Industry Relationships
We have a network of industry relationships that provide a wide range of strategic and financial benefits,
including product/financial support, licensing and manufacturer training.
• Product/Financial Support. Product/financial support is an integral component of our business
strategy and is present throughout our schools. In these relationships, sponsors provide their products,
including equipment and supplies, at reduced or no cost to us, in return for our use of those products
in the classroom. Additionally, they may provide financial sponsorship either to us or to our students.
Product/financial support is an attractive marketing opportunity for sponsors because our classrooms
provide them with early access to the future end-users of their products. As students become familiar
with a manufacturer’s products during training, they may be more likely to continue to use the same
products upon graduation. Our product support relationships allow us to minimize the equipment
and supply costs in each of our classrooms and significantly reduce the capital outlay necessary for
operating and equipping our campuses.
An example of a product/financial support relationship is:
Snap-on Tools. We have a strategic agreement with Snap-on Tools, a premier tool provider
to the industries we serve. Upon graduation from our undergraduate programs, students
receive a Snap-on Tools entry-level tool set having an approximate retail value of $1,000,
which can become valuable as a student establishes their career. We purchase these tool
sets from Snap-on Tools at a discount from their list price pursuant to a written agreement
which expires in April 2017. In the context of this relationship, we have granted Snap-on
Tools exclusive access to our campuses to display tool related advertising, and we have
agreed to use Snap-on Tools equipment to train our students. We receive credits from Snap-
on Tools for student tool kits that we purchase and any additional purchases made by our
students. We can then redeem those credits in multiple ways, which historically has been
to purchase Snap-on Tools equipment and tools for our campuses at the full retail list price.
•
Licensing. Licensing agreements enable us to establish meaningful relationships with key industry
brands. We pay a licensing fee and, in return, receive the right to use a particular industry participant’s
name, logo or trademark in our promotional materials and on our campuses. We believe that our
current and potential students generally identify favorably with the recognized brand names licensed
to us, enhancing our reputation and the effectiveness of our marketing efforts.
An example of a licensing arrangement is:
NASCAR. We have a licensing arrangement with NASCAR and we are its exclusive
education provider for automotive technicians. The agreement expires on December 31,
2024 and may be terminated for cause by either party at any time prior to its expiration.
This relationship provides us with access to the network of NASCAR sponsors, presenting
us with the opportunity to enhance our product support relationships. In July 2002, NASCAR
Technical Institute opened in Mooresville, North Carolina where students have the
opportunity to take NASCAR-specific elective courses that were developed through a
collaboration of NASCAR crew chiefs and motorsports industry leaders. The popular
NASCAR brand name combined with the opportunity to learn on high-performance cars is
a powerful recruiting and retention tool. It also provides students with the opportunity to
learn first-hand with NASCAR engines and equipment and to acquire specific skills required
for entry-level positions in automotive and racing-related career opportunities.
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See Note 14 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report
on Form 10-K for further discussion of licensing agreements.
• Manufacturer Training. Manufacturer training relationships provide benefits to us that impact each
of our education programs. These relationships support entry-level training tailored to the needs of
a specific manufacturer, as well as continuing education and training of experienced technicians. In
both the entry-level and continuing education programs, students receive training on a given
manufacturer’s products. In return, the manufacturer supplies vehicles, equipment, specialty tools
and parts at reduced prices or at no charge and assistance in developing curricula. Students who
receive the entry-level training may earn manufacturer certification to work on that manufacturer’s
products when they complete the program. The manufacturer certification typically leads to both
improved employment opportunities and the potential for higher wages. The continuing education
programs for experienced technicians are paid for by the manufacturer and often take place in our
facilities, allowing the manufacturer to avoid the costs associated with establishing its own dedicated
facility. Manufacturer training relationships lower the capital investment necessary to equip our
classrooms and provide us with a significant marketing advantage. In addition, through these
relationships, manufacturers are able to increase the pool of skilled technicians available to service
and repair their products.
Examples of manufacturer training relationships include:
Nissan North America, Inc. This is an example of a student-paid MSAT program. We offer
the Nissan Automotive Technician Training elective program at our Houston, Texas; Long
Beach, California; Mooresville, North Carolina; Orlando, Florida and Norwood,
Massachusetts campuses. The Nissan Program uses training and course materials as well
as training vehicles and equipment provided by Nissan North America Inc.
American Honda Motor Co., Inc. This is an example of a dealer technician training program
paid for by the manufacturer or dealer. We provide marine and motorcycle training for
experienced American Honda technicians utilizing training materials and curricula provided
by American Honda. Our instructors provide marine and motorcycle dealer training at
American Honda-authorized training centers across the United States. We oversee the
administration of the motorcycle training program, including technician enrollment.
Additionally, American Honda supports our campus Hon Tech training program by donating
equipment and providing curricula.
Porsche Cars of North America, Inc. This is an example of a manufacturer-paid MSAT
program. We have a written agreement with Porsche Cars of North America, Inc. whereby
we provide the Porsche Technician Apprenticeship Program at the Porsche training centers
in Atlanta, Georgia and Easton, Pennsylvania using vehicles, equipment, specialty tools and
curricula provided by Porsche. The written agreement expires September 30, 2019 and may
be renewed by mutual agreement.
•
Industry Employer Incentives. OEM and non-OEM large national employers of our graduates
compete for newly trained technicians to fill their technician shortage. In response to this, industry
employers have worked with us to create more comprehensive recruitment and retention strategies
which benefit our students and graduates. The strategies continue to evolve, but common techniques
include tuition reimbursement programs (TRIP), where employers pay back some or all of a graduate's
student loan, as well as tool incentives, relocation packages, mentorship programs and part-time
employment opportunities while attending school. Tuition reimbursement amounts range from $2,700
to full student loan reimbursement. This industry support lowers the cost for students to attend our
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programs and begin their careers as technicians while also allowing industry employers to increase
the pool of skilled technicians to fill their open positions.
Examples of industry employer incentives include:
Penske Automotive Group. Penske Automotive Group offers tuition reimbursement, tool
reimbursement and tenure bonuses.
AutoNation. AutoNation's Eastern Region offers tuition reimbursement and relocation
assistance, or a sign-on bonus and tool allowance.
Crown Lift Trucks. Crown Lift Trucks offers tuition reimbursement.
Ryder Systems, Inc. Ryder Systems, Inc. offers tuition reimbursement, a quarterly incentive
program and a new hire mentorship program.
Student Recruitment Model
Our student recruitment efforts begin with our commitment to positive outcomes, both for our students
and our industry relationships. Our responsibility to present job-ready graduates to employers requires that we
recruit, enroll and train prospective students who have the drive and potential to successfully pursue a career in
their field of training. We use a multi-touch media approach that involves national and local outreach to generate
the quality and quantity of prospective students necessary for our three primary admissions channels to enroll and
start students.
Marketing and Advertising. Our marketing strategies are designed to identify potential students who
would benefit from our programs and pursue successful careers upon graduation. We leverage an integrated inquiry
generation platform that focuses on generating awareness and engagement, both nationally and locally, where our
website acts as the primary hub of our campaigns, to inform and educate potential students on the nature and cost
of our educational programs and the employment opportunities that could be available to them. Currently, we
advertise on television, internet search, social media, display, online video and other internet-based content, radio
and in magazines. We use events, sponsorships, social media, direct mail, email, texting and telephonic response
to reach prospective students.
Recruitment. Our recruiting policy is intended to maximize the efficiency of our admissions
representatives by focusing on the students most likely to succeed in our programs and as a technician. Our
admissions representatives are provided with training and tools to assist any prospective student.
• High Schools. Our field-based representatives recruit prospective students primarily from high
schools across the country with assigned territories covering the United States and U.S. territories.
Our field-based admissions representatives generate the majority of their inquiries by making career
presentations at high schools. Typically, the field-based admissions representatives enroll high school
students during an application interview conducted at the homes of prospective students.
Our reputation in local, regional and national business communities, endorsements from high school
instructors and guidance counselors and the recommendations of satisfied graduates and employers
are some of our most effective recruiting tools. Accordingly, we strive to build relationships with
the people who influence the career decisions of prospective students, such as vocational instructors
and high school guidance counselors. We conduct seminars for high school career counselors and
instructors at our training facilities and campuses as a means of further educating these individuals
on the merits of our technical training programs. We also participate in national skills competitions
as judges and offer STEM (Science, Technology, Engineering and Math) curriculum integration
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assistance to secondary education instructors. Our representatives focus on expanding high school
relationships and increasing access to high schools beyond the traditional vocational programs and
into academic classes. Our programs align with STEM principles, and we actively work to increase
this awareness in high school educators and prospective students.
• Military Personnel. Our military representatives are strategically located throughout the country
and focus on building relationships with military installations. Additionally, we have a centralized
team of military representatives who are dedicated to serving and assisting veterans throughout the
U.S. We develop relationships with military personnel and provide information about our training
programs by delivering career presentations to transitioning service members who are approaching
their date of separation or have recently separated from the military as a means of further educating
these individuals on the merits of our technical training programs. We continue to expand the courses
offered under our unique instructional program teaching introductory motorcycle mechanics classes
at Fort Bliss in El Paso, Texas. These classes are designed to introduce motorcycle theory to active
military personnel and expose them to the opportunity to transfer to an MMI campus to complete
their program after they are discharged from the military. This continues to be part of our ongoing
initiative to serve the needs of transitioning veterans and military personnel.
• Adult Students. Our campus-based representatives recruit adult career-seeker or career-changer
students. These representatives respond to student inquiries generated from national, regional and
local advertising and promotional activities. Since adults tend to start our programs throughout the
year instead of in the fall as is most typical of traditional school calendars or for recent high school
graduates, these students help balance our enrollment throughout the year.
Student Admissions and Retention
We currently employ field, military and campus-based admissions representatives who work directly with
prospective students to facilitate the enrollment process. Enrollment applications are reviewed by a central
enrollment office for accuracy and completion before students are enrolled into the program of study. Different
programs have varying admissions standards.
Applicants must provide proof of one of the following: high school graduation or its equivalent;
certification of high school equivalency (G.E.D. or approved State Equivalency Exam); successful completion of
a degree program at the postsecondary level or successful completion of officially recognized home schooling.
Certain states require official transcripts or G.E.D. test scores instead of the certificates.
To maximize the likelihood of student retention and graduation, our admissions process is intended to
identify students who have the desire and ability to succeed in their chosen program. We have student services
professionals and other resources that provide various student services, including orientation, tutoring, student
housing assistance, and academic, financial, personal and employment advisement. We have established processes
to identify students who may be in need of assistance to succeed in and complete their chosen program.
Enrollment
We enroll students throughout the year and courses start every three to six weeks. For the year ended
September 30, 2016, our average undergraduate full-time student enrollment was approximately 12,000,
representing a decrease of approximately 9.1% as compared to 13,200 for the year ended September 30, 2015.
Currently, our student body is geographically diverse, with approximately 50% of our students having relocated
to attend our programs. Due to the seasonality of our business and normal fluctuations in student populations, we
would expect volatility in our quarterly results. See "Seasonality" within Part II, Item 7 of this Report on Form
10-K for further discussion of seasonal fluctuations in revenues and operating results.
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Graduate Employment
As described in “Business - Schools and Programs” included elsewhere in this Report on Form 10-K, our
programs prepare graduates for careers in industries using the training we provide, primarily as automotive, diesel,
collision repair, motorcycle and marine technicians. Identifying employment opportunities and preparing our
graduates for these careers is critical to our ability to help our graduates benefit from their education. Accordingly,
we dedicate significant resources to maintaining an effective employment team. Our campus-based staff facilitates
several career development processes, including instruction and coaching for interview skills, interview etiquette
and professionalism. Additionally, the employment team provides students with reference materials and assistance
with the composition of resumes. Finally, we place emphasis on and devote significant time to assisting students
with part-time and graduate job searches.
We also have a centralized department whose focus is to build and maintain relationships with potential
and existing national employers and develop graduate job opportunities and, where possible, relocation assistance,
sign-on bonuses, tool packages and tuition reimbursement plans with our OEMs and other industry employers.
Together, the campuses and centralized department coordinate and host career fairs, industry awareness
presentations, interview days and employer visits to our campus locations. We believe that our graduate employment
services provide our students with a compelling value proposition and enhance the employment opportunities for
our graduates.
Our employment rate for both 2015 and 2014 graduates who were employed within one year of graduation
was 88%. The employment calculation is based on all graduates, including those that completed MSAT programs,
from October 1, 2014 to September 30, 2015 and October 1, 2013 to September 30, 2014, respectively, excluding
graduates not available for employment because of continuing education, military service, medical reasons,
incarceration, death or international student status. We count a graduate as employed based on a verified
understanding of the graduate’s job duties to assess and confirm that the graduate’s primary job responsibilities
are in his or her field of study. We verify employment by sending written verification requests to both the graduate
and the employer. The verifications must include employer name, job duties, job title, hire date and employer
contact. Once we receive written verification from either source, the graduate is counted as employed. If we are
unable to obtain written verification, we also count graduates as employed if we are able to obtain verbal verification
from both the graduate and the employer. We periodically review a sample of employment verifications to ensure
accuracy.
For 2015, we had approximately 9,700 total graduates, of which approximately 9,100 were available for
employment. Of those graduates available for employment, approximately 8,000 were employed within one year
of their graduation date, for a total of 88%. For 2014, we had approximately 9,900 total graduates, of which
approximately 9,200 were available for employment. Of those graduates available for employment, approximately
8,100 were employed within one year of their graduation date, for a total of 88%.
Faculty and Employees
Faculty members are hired nationally in accordance with established criteria, applicable accreditation
standards and applicable state regulations. Members of our faculty are primarily industry professionals and are
hired based on their prior work and educational experience. We require a specific level of industry experience in
order to enhance the quality of the programs we offer and to address current and industry-specific issues in the
course content. We provide intensive instructional training and continuing education to our faculty members to
maintain the quality of instruction in all fields of study. A majority of our existing instructors have a minimum of
five years experience in the industry and an average of eight years of experience teaching at UTI, ranging from
less than 1 year to 32 years. Our average undergraduate student-to-teacher ratio is approximately 20-to-1.
Each school’s support team typically includes a campus president, an education director, a financial aid
director, a student services director, an employment services director, a controller and a facilities director. As of
15
September 30, 2016, we had approximately 1,880 full-time employees, including approximately 590 student
support employees and approximately 670 full-time instructors.
Our employees are not represented by labor unions and are not subject to collective bargaining agreements.
We have encountered in the past, and may encounter in the future, employees who desire to seek union representation
at new or existing campuses. We have never experienced a work stoppage and we believe that we have good
relationships with our employees.
Competition
The for-profit, post-secondary education industry is highly competitive and highly fragmented, with no
one provider controlling significant market share. We compete with other institutions that are eligible to receive
Title IV funding, including not-for-profit public and private schools, community colleges and all for-profit
institutions which offer automotive, diesel, collision repair, motorcycle and marine technician training as well as
other skilled trades training programs. Our competition differs in each market depending on the curriculum that
we offer and the availability of other choices, including job prospects. Our main competitors for the programs we
provide are local community colleges, mainly due to local accessibility and low tuition rates. There is no single
community college that is a significant competitor; rather, the sector as a whole provides competition. Within the
for-profit career-oriented and technical school sector, some of our national and regional competitors include
programs offered by Lincoln Technical Institute, WyoTech, and University of Northern Ohio. We consider other
single location institutions, with a larger local presence near one of our campuses, as competitors as well. We also
compete with our industry partners and other manufacturers and employers of our graduates; when employers do
not have a sufficient supply of trained technicians, they may hire untrained technicians and train them via internships
or other internal training. Competition is generally based on location, the type of programs offered, the quality of
instruction and instructional facilities, graduate employment rates, reputation, recruiting and tuition rates. Public
institutions are generally able to charge lower tuition than our schools, due in part to government subsidies and
other financial sources not available to for-profit schools.
According to provisional data available through the National Center for Education Statistics (NCES), for
the twelve months ended June 30, 2015, we had 9,771 graduates; Lincoln Technical Institute had 3,569 graduates;
University of Northern Ohio had 1,159 graduates and WyoTech had 2,406 graduates in programs similar to ours.
This data also shows that no individual community college had a number of graduates commensurate with ours in
similar programs. Further, we partner with over 30 OEMs to provide manufacturer specific advanced training. We
believe that we have the largest number of OEM branded training programs. These OEMs provide vehicles,
equipment, specialty tools and curricula that lead to increased training and employment opportunities for our
students, including the potential for brand specific certifications. For additional information regarding the benefits
of the relationships with OEMs, see “Business - Business Model” and “Business - Business Strategy” included
elsewhere in this report on Form 10-K. We believe that our industry relationships, brand recognition and national
presence provide significant benefits to our students, our graduates and their employers while differentiating us
from other technical training schools.
Environmental Matters
We use hazardous materials at our training facilities and campuses and generate small quantities of
regulated waste, including, but not limited to, used oil, antifreeze, transmission fluid, paint, solvents and car
batteries. As a result, our facilities and operations are subject to a variety of environmental laws and regulations
governing, among other things, the use, storage and disposal of solid and hazardous substances and waste, and the
clean-up of contamination at our facilities or off-site locations to which we send or have sent waste for disposal.
Certain of our campuses are required to obtain permits for our air emissions. In the event we do not maintain
compliance with any of these laws and regulations, or if we are responsible for a spill or release of hazardous
materials, we could incur significant costs for clean-up, damages, and fines or penalties.
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Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
on our website at www.uti.edu under the “Investors - Financial Information - SEC Filings” captions, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reports of our
executive officers, directors and any other persons required to file securities ownership reports under Section 16
(a) of the Exchange Act are also available through our website. Information contained on our website is not a part
of this Report and is not incorporated herein by reference.
In Part III of this Report on Form 10-K, we “incorporate by reference” certain information from parts of
other documents filed with the SEC, specifically our proxy statement for the 2017 Annual Meeting of Stockholders.
The SEC allows us to disclose important information by referring to it in that manner. Please refer to such
information. We anticipate that on or about January 15, 2017, our proxy statement for the 2017 Annual Meeting
of Stockholders will be filed with the SEC and available on our website at www.uti.edu under the “Investors -
Financial Information - SEC Filings” captions.
Information relating to our corporate governance, including our Code of Conduct for all of our employees
and our Supplemental Code of Ethics for our Chief Executive Officer and senior financial officers, and information
concerning Board Committees, including Committee charters, is available on our website at www.uti.edu under
the “Investors - Corporate Governance” captions. We will provide copies of any of the foregoing information
without charge upon written request to Universal Technical Institute, Inc., 16220 North Scottsdale Road, Suite
100, Scottsdale, Arizona 85254, Attention: Investor Relations.
See Note 18 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report
on Form 10-K for summary segment financial information.
Regulatory Environment
Our institutions participate in a variety of government-sponsored financial aid programs that assist students
in paying their cost of education. The largest source of such support is the federal programs of student financial
assistance under Title IV of the HEA. This support, commonly referred to as Title IV Programs, is administered
by ED. In 2016, we derived approximately 72% of our revenues, on a cash basis as defined by ED, from Title IV
Programs, as calculated under the 90/10 rule.
To participate in Title IV Programs, an institution must be authorized to offer its programs of instruction
by relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified
as an eligible institution by ED. To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the
Montgomery GI Bill, the Reserve Education Assistance Program (REAP), and VA Vocational Rehabilitation, an
institution must comply with certain requirements established by the VA. Additionally, certain states and their
attorneys general require additional authorization to operate our institutions or for our students to receive state
funding. Furthermore, ED has established a task force overseeing proprietary postsecondary companies which
consists of ED, the Consumer Financial Protection Bureau (CFPB), the SEC, the Federal Trade Commission (FTC),
the Internal Revenue Service (IRS) and the Departments of Veterans Affairs, Defense, Treasury, Labor and Justice.
For these reasons, our institutions are subject to extensive regulatory requirements imposed by all of these entities.
State Authorization and Regulation
Each of our institutions must be authorized by the applicable state education agency where the institution
is located to operate and offer a postsecondary education program to its students. Our institutions are subject to
extensive, ongoing regulation by each of these states. Additionally, our institutions are required to be authorized
17
by the applicable state education agencies of certain other states in which our institutions recruit students. Currently,
each of our institutions is authorized by the applicable state education agency or agencies.
The level of regulatory oversight varies substantially from state to state and is extensive in some states.
State laws typically 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. State laws and regulations may limit our ability to offer educational programs and
to award degrees or diplomas. Some states prescribe standards of financial responsibility that are not consistent
with those required by ED and some mandate that institutions post surety bonds. Currently, we have posted surety
bonds on behalf of our institutions and admissions representatives with multiple states of approximately $19.6
million. We are in the process of renegotiating the bonds required to operate and anticipate collateralizing
approximately $11.5 million in bonds. We believe that each of our institutions is in substantial compliance with
state education agency requirements.
States often change their requirements in response to ED regulations or to implement requirements 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. Changes in state requirements in
Massachusetts and other states have resulted in changes to our recruiting and other operations in those states and
have increased our costs of doing business. If any one 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.
Accreditation
Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing
qualitative reviews by an organization of peer institutions. Accrediting commissions examine the academic quality
of the institution’s instructional programs, and a grant of accreditation is generally viewed as confirmation that the
institution’s programs meet generally accepted academic standards and practices. Accrediting commissions also
review the administrative and financial operations of the institutions they accredit to ensure that each institution
has the resources necessary to perform its educational mission, implement continuous improvement processes and
support student success.
Accreditation by an ED-recognized commission is required for an institution to be certified to participate
in Title IV Programs. In order to be recognized by ED, an accrediting agency must adopt specific standards for its
review of educational institutions and must undergo a periodic process for renewal of its ED recognition. The
renewal process begins with a review and analysis by ED staff of written application materials submitted by the
accrediting agency. The application materials and ED’s staff analysis are then submitted to the National Advisory
Committee on Institutional Quality and Integrity (NACIQI) for consideration.
All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges
(ACCSC), a national accrediting agency recognized by ED. In August 2016, NACIQI recommended that ED
renew its recognition of ACCSC for a period of five years; in October 2016, ED accepted this recommendation
and renewed ACCSC's recognition for a period of five years.
18
We believe that each of our institutions is in substantial compliance with ACCSC accreditation standards.
If any one of our institutions lost its accreditation, students attending that institution would no longer be eligible
to receive Title IV Program funding and we could be forced to close that institution. Our campuses' five-year grants
of accreditation expire as follows:
Campus
Exton, Pennsylvania*
Dallas/Ft. Worth, Texas
Long Beach, California**
Norwood, Massachusetts
Sacramento, California
Mooresville, North Carolina; NASCAR Technical Institute (NASCAR Tech)
Avondale, Arizona
Orlando, Florida
Houston, Texas
Lisle, Illinois
Rancho Cucamonga, California
Phoenix, Arizona; Motorcycle Mechanics Institute (MMI)
October 2016
March 2017
September 2017
July 2017
December 2017
December 2018
February 2019
February 2019
February 2019
February 2019
February 2019
May 2019
* Our Exton, Pennsylvania campus’ accreditation expired in October 2016. We completed the renewal site visit
for accreditation in June 2016 and we are awaiting renewal of accreditation.
** Our Long Beach, California campus’ initial grant of accreditation based on approval from California's Bureau
for Private Postsecondary Education was received on March 2, 2015. The campus will be eligible for a five-year
grant of accreditation in September 2017.
Our 2016 annual report has been completed and submitted to ACCSC. Twelve of our approximately 244
approved programs did not meet the graduation rate requirements; all of our programs met the employment rate
requirements. ACCSC may require additional reporting regarding these programs or institutions, and the program
or institution could be at risk of a show cause or other adverse action that could lead to sanctions, including but
not limited to loss of accreditation of the program or institution. An institution placed on reporting status is required
to report periodically to ACCSC on that institution’s performance in the area or areas specified by ACCSC. In July
2016, we launched an initiative to improve graduation outcomes across all of our campuses, which included the
implementation of an early detection tool that helps us identify students who may be at risk of not completing their
program.
Nature of Federal and State Support for Postsecondary Education
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. Most aid under Title IV Programs is awarded on the basis of financial
need, generally defined as the difference between the cost of attending the institution and the amount a student can
reasonably contribute to that cost. All recipients of Title IV Program funds must maintain a satisfactory grade
point average and make academic progress, as defined by ED, towards the completion of their program of study
as well as meet other eligibility requirements. In addition, each institution must ensure that Title IV Program funds
are properly accounted for and disbursed in the correct amounts to eligible students, as well as provide a variety
of disclosures and reports on recipient data and program expenditures.
19
During 2016, based on their individual eligibility under the following Title IV Programs, our students
received grants and loans from the William D. Ford Federal Direct Loan (DL) program, the Federal Pell Grant
(Pell) program, the Federal Supplemental Educational Opportunity Grant (FSEOG) program and the Federal
Perkins Loan (Perkins) program.
Federal Title IV Programs
DL. Under the DL program, ED makes loans to students or their parents. Borrowers repay these loans
to ED according to the terms and conditions of the program. Students with financial need continue to qualify for
interest subsidies on subsidized loans while in school up through 150% of the published length of the student's
program. Students with subsidized loans also qualify for interest subsidies while in the 6-month grace period and
during periods of deferment. Students with unsubsidized loans do not qualify for interest subsidies. Non-need-
based unsubsidized loans are also available to students or their parents. In 2016, we derived approximately 55%
of our revenues, on a cash basis, from the DL program.
Pell. Under the Pell program, ED makes grants to students who demonstrate financial need based on the
federal Free Application for Federal Student Aid (FAFSA). In 2016, we derived approximately 17% of our revenues,
on a cash basis, from the Pell program.
FSEOG. FSEOG grants are designed to supplement Pell grants for students with the greatest financial
need. Institutions must provide matching funding equal to 25% of all awards made under this program. In 2016,
we derived less than 1% of our revenues, on a cash basis, from the FSEOG program.
Perkins. Perkins loans are made from a revolving institutional account in which 75% of new funding is
capitalized by ED and the remainder by the institution. Each institution is responsible for collecting payments on
Perkins loans from its former students and lending those funds to currently enrolled students. Defaults by students
on their Perkins loans reduce the amount of funds available in the institution’s revolving account to make loans to
additional students. Since the federal award year beginning July 1, 2004, ED has made no new Perkins allocations
to institutions due to federal appropriations limitations. In 2016, we derived less than 1% of our revenues, on a
cash basis, from the Perkins program.
The Federal Perkins Loan Program had previously been subject to a September 30, 2015 end date. On
December 18, 2015, President Obama signed the Federal Perkins Loan Program Extension Act of 2015 into law,
which allowed an extension of the program to make loans to undergraduate borrowers until September 30, 2017,
after which point new Perkins loans will be prohibited. ED has provided guidance on the wind-down of the program.
Other Federal and State Programs
Some of our students 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 our students in the form of grants, loans or scholarships. The
eligibility requirements for state financial aid vary by funding agency and program.
The 2012 California Budget Act, enacted on June 27, 2012, imposed new eligibility requirements for
institutions participating in the Cal Grant program funded by the state of California. In particular, institutions are
required to achieve a three-year cohort default rate of less than 15.5% to remain eligible for the Cal Grant program
as well as a graduation rate above 30%. As a result of their respective cohort default rates, our Universal Technical
Institute of Phoenix institution, which includes our Sacramento, California campus, and our Universal Technical
Institute of Arizona institution, which includes our Rancho Cucamonga, California and recently opened Long
Beach, California campuses, became ineligible for the Cal Grant program with the 2013-2014 and 2014-2015
award years, respectively. In September 2016, ED released updated cohort default rates for each of our institutions.
20
The rate for our Universal Technical Institute of Arizona institution fell below the Cal Grant ceiling of 15.5%,
which will allow us to apply for re-instatement to the Cal Grant program for the 2017-2018 award year.
Veterans' Benefits. Since October 1, 2011, the Post-9/11 GI Bill has been effective for both degree and
non-degree granting institutions of higher learning, allowing eligible veterans to use their Post-9/11 GI Bill benefits
at all of our institutions. Additionally, veterans use benefits such as the Montgomery GI Bill, the REAP and VA
Vocational Rehabilitation at our campuses. We derived approximately 19% of our revenues, on a cash basis, from
veterans' benefits programs in 2016. To participate in veterans' benefits programs, including the Post-9/11 GI Bill,
the Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain
requirements established by the VA. These criteria require, among other things, that the institution:
•
report on the enrollment status of eligible students;
• maintain student records and make such records available for inspection;
•
•
follow current VA rules; and
comply with applicable limits on the percentage of students receiving certain veterans benefits on a
program or campus basis.
If we fail to comply with these requirements, we could lose our eligibility to participate in veterans'
benefits programs.
The VA imposes limitations on the percentage of students per program receiving benefits under certain
veterans’ benefits programs, unless the program qualifies for certain exemptions. If the VA determines that a
program is out of compliance, the VA will continue to provide benefits to current students, but new students will
not be eligible to use their veterans benefits for an affected program until we demonstrate compliance.
The VA shares responsibility for VA benefit approval and oversight with designated State Approving
Agencies (SAAs). SAAs play a critical role in evaluating institutions and their programs to determine if they meet
VA benefit eligibility requirements. Processes and approval criteria as well as interpretation of applicable
requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval
in all states. If we are unable to secure approvals in one or more states, or if the process for obtaining an approval
takes significant time, we could be required to alter the delivery methodology or structure of the program or
experience delays in or the loss of a portion of VA funding. Students receiving VA funding may not have the same
flexibility in scheduling their coursework.
Since July 2012, the Texas SAA has approved the use of Veterans benefits to fund tuition under our
original Automotive and Diesel Technology II delivery method at our Dallas/Ft. Worth, Texas campus. During
2015 and 2016, we have had ongoing dialogue with the Texas SAA regarding a transition to an alternative delivery
method for veterans at this campus, and the enrollment of veteran students at this campus was discontinued in July
2015. The Texas SAA had communicated that the program at this campus remained approved until April 15, 2016.
We submitted modifications to the ACCSC and received ACCSC approval in February 2016 and state approval in
March 2016. We have since gained approval to resume enrolling veteran students in the modified programs and
began re-enrolling in July 2016. During 2015, we received approval from the California SAA to use veterans’
benefits to fund courses under this curricula in California under an alternative method we had previously proposed.
Additionally, we received approval from the Florida SAA to use veterans’ benefits to fund all course combinations
under this curricula in Florida under the alternative methodology.
During 2012, President Obama signed an Executive Order directing the DOD, Veterans Affairs and
Education to establish “Principles of Excellence” (Principles), based on certain guidelines set forth in the Executive
Order, to apply to educational institutions receiving federal funding for service members, veterans and family
21
members. As requested, we provided written confirmation of our intent to comply with the Principles to the VA
in June 2012. We are required to comply with the Principles to continue recruitment activities on military
installations. Additionally, there is a requirement to possess a memorandum of understanding (MOU) with the
U.S. DOD as well as with certain individual installations. Our access to bases for student recruitment has become
more limited due to recent changes in the Transition Assistance Program (Transition Goals, Plans, Success) and
increased enforcement of the MOU requirement. Each of our institutions has an MOU with the U.S. DOD. We
have MOUs with certain key individual installations and are pursuing MOUs at additional locations; however,
some installations will not provide MOUs to institutions that do not teach at the installation. We continue to
strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and
rebuild our access to military installations.
Regulation of Federal Student Financial Aid Programs
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant
state education agencies, be accredited by an accrediting commission recognized by ED and be certified as eligible
by ED. ED will certify an institution to participate in 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. All of our institutions are certified to participate in
Title IV Programs.
ED’s Title IV program standards are applied primarily on an institutional basis, with an institution defined
by ED as a main campus and its additional locations, if any. Each institution is assigned a unique Office of Post-
Secondary Education Identification Number (OPEID). Under this definition for ED purposes we have the following
three institutions:
Institution
Main campus
Additional campuses
Universal Technical Institute of Arizona
Universal Technical Institute, Avondale, Arizona
Universal Technical Institute, Lisle, Illinois
Universal Technical Institute, Long Beach, California
Universal Technical Institute, Rancho Cucamonga, California
NASCAR Technical Institute, Mooresville, North Carolina
Universal Technical Institute, Norwood, Massachusetts
22
Institution
Main campus
Additional campuses
Universal Technical Institute of Phoenix
Universal Technical Institute DBA Motorcycle Mechanics Institute,
Motorcycle & Marine Mechanics Institute, Phoenix, Arizona
Universal Technical Institute, Sacramento, California
Universal Technical Institute, Orlando, Florida
Divisions
Motorcycle Mechanics Institute, Orlando, Florida
Marine Mechanics Institute, Orlando, Florida
Automotive, Orlando, Florida
Institution
Main campus
Additional campuses
Universal Technical Institute of Texas
Universal Technical Institute, Houston, Texas
Universal Technical Institute, Exton, Pennsylvania
Universal Technical Institute, Dallas/Ft. Worth, Texas
The substantial amount of federal funds disbursed through Title IV Programs, the large number of students
and institutions participating in those programs and instances of fraud and abuse have prompted ED to exercise
significant regulatory oversight over institutions participating in Title IV Programs. Accrediting commissions and
state agencies also oversee compliance with both their respective standards and certain Title IV Program
requirements. As a result, each of our institutions is subject to detailed oversight and review and must comply with
a complex framework of laws and regulations. Because ED periodically revises its regulations and changes its
interpretation of existing laws and regulations, we cannot predict with certainty how the Title IV Program
requirements will be applied in all circumstances.
Significant factors relating to Title IV Programs that could adversely affect us include the following:
Congressional Action. Political and budgetary concerns significantly affect Title IV Programs. Congress
has historically reauthorized the HEA approximately every five to six years. The HEA was reauthorized, amended
and signed into law most recently on August 14, 2008; a new reauthorization process has begun with hearings and
draft legislation in the Senate Committee on Health, Education, Labor and Pensions and the House Committee on
Education and the Workforce. Congress reviews and determines federal appropriations for Title IV Programs at
least annually.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the CFPB, which
became active during 2012. The CFPB is tasked with overseeing large banks and certain other types of nonbank
23
financial companies, including alternative loan providers, for compliance with federal consumer financial
protection laws. It is possible that our proprietary loan program will be subject to such review.
Title IV Cash Management. On October 30, 2015, ED published a set of new final regulations which
became effective on July 1, 2016. The regulations include, among other things, revised cash management
requirements related to holding Title IV credit balances. The regulations specify that institutions subject to
heightened cash monitoring or reimbursement payment methods will not be permitted to hold any Title IV credit
balances regardless of student or parent authorization. Instead, these institutions will be required to first credit a
student’s ledger account for the amount of Title IV funds the student or parent is eligible to receive, and pay such
credits to the student or parent within 14 calendar days, prior to initiating a request from ED for funds that include
those students and parents. As of October 10, 2016, we began disbursing funds under the heightened cash monitoring
method; see "Financial Responsibility Standards" below. We believe we are in compliance with the new cash
management requirements.
Incentive Compensation. In 2010, ED issued revised regulations pertaining to incentive compensation,
which became effective July 1, 2011. The new regulations eliminated the 12 safe harbors in the former regulations,
and provide that an institution participating in Title IV Programs may not provide any commission, bonus or other
incentive payment based in any part, directly or indirectly, on success in securing enrollments or the award of
financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions
regarding the awarding of Title IV Program funds. When it issued the regulations, ED also stated that it does not
intend to provide private guidance to individual institutions on their specific compensation practices, but that it
may issue additional broadly applicable guidance to all institutions from time to time.
The revised incentive compensation regulations and the ED guidance that accompanied the revised
regulations when they were issued in 2010 prohibited institutions from:
• making salary adjustments to covered employees based, in any part, directly or indirectly, on the
employee’s success in securing enrollments or financial aid, or the number of students recruited, enrolled
or awarded financial aid;
•
•
providing any payments or incentives to covered employees based on students’ graduation or completion
of any part of their program, although, as discussed below, ED recently issued new revised guidance
regarding graduation and completion-based compensation; and
paying any incentives to covered employees based on how many students receive jobs in their field of
study after graduation.
The compensation restrictions apply to any employee who undertakes recruiting or admitting of students,
or who makes decisions about and awards Title IV Program funds, as well as any higher level employee with
responsibility for recruitment or admission of students, or making decisions about awarding Title IV Program
funds. Furthermore, the regulations state that the same restrictions on an institution’s payments to its own individual
employees will also be applied with limited exceptions to an institution’s payments to an outside company engaged
in certain admissions, recruiting or financial aid activities.
ED published guidance in November 2015 that eliminated certain restrictions on incentive compensation
for admissions representatives. Specifically, ED reconsidered its previous interpretation and stated that its
regulations do not prohibit compensation for admissions representatives that is based upon students’ graduation
from, or completion of, educational programs. Compensation based on enrolling students continues to be
prohibited. ED also stated that in assessing the legality of a compensation structure, ED will evaluate whether
compensation labeled as graduation-based or completion-based compensation is in substance enrollment-based
compensation. We have begun making adjustments to the compensation practices for our admissions
representatives which we believe comply with ED's November 2015 guidance. The transition period for the new
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compensation structure will continue through calendar year 2018. We will continue to evaluate other compensation
options under these regulations and guidance.
Because the regulations differ significantly from the prior regulations, and because of the imprecise nature
of many aspects of these regulations and ED's published guidance, it is not clear how ED will apply these regulations
in all circumstances. Although we cannot guarantee that ED will not take a position that some aspect of our
compensation practices is not in compliance with these regulations, we believe that our compensation plans are in
substantial compliance with the regulations. ED's revisions to the regulations continue to adversely affect our
ability to compensate our employees and our compensation practices for third parties.
Gainful Employment. The HEA generally requires for-profit institutions to provide programs of training
that prepare students for gainful employment in a recognized occupation in order for the students enrolled in those
programs to qualify for Title IV Program assistance. On June 13, 2011, ED published regulations imposing
additional Title IV Program eligibility requirements on certain educational programs required to lead to gainful
employment. These regulations established metrics for determining whether a program would qualify as an eligible
program, but the metrics and related reporting requirements were vacated by the U.S. District Court for the District
of Columbia (District Court) on June 30, 2012, prior to their effective date. Under portions of the regulations not
vacated, most proprietary postsecondary institutions, including our institutions, are still required to provide
extensive disclosures for prospective students and the public. The disclosures include each covered program’s
costs, length and on-time completion rate, as well as the recognized occupations for which each program is intended
to prepare graduates and the graduate employment rate and median loan debt of individuals who complete each
program. We have established a webpage located at www.uti.edu/disclosure for this purpose.
In 2014, ED promulgated a second gainful employment rule, which established new debt metrics and
related reporting requirements to replace those vacated by the District Court. ED published the final successor
gainful employment rule on October 31, 2014. Most parts of the new rule were effective on July 1, 2015, except
that the new disclosure requirements do not take effect until January 1, 2017, until which time institutions must
continue to comply with the disclosure requirements discussed previously. The final rule requires institutions to
satisfy one of two debt-to-earnings (DE) ratios in order to maintain Title IV Program eligibility. The rule also
requires institutions to make certain certifications with respect to each of their gainful employment programs, to
annually report certain information to ED, and to make disclosures to prospective students and the public. The
following is a summary of the key elements of the final rule.
Applicability
The final rule applies to all of our Title IV eligible programs intended by the HEA to lead to gainful
employment in a recognized occupation. ED will use two DE calculations to compare the debt incurred by each
program’s Title IV recipients to their annual earnings following graduation. Specifically, our programs will qualify
under the gainful employment rules if we can establish that the program meets at least one of the following two
annual DE metrics:
•
•
annual debt to earnings rate (aDTE) which requires that the estimated median annual loan payment of a
particular cohort of graduates not exceed eight percent of the higher of the mean or median earnings of
those graduates, based on earnings information obtained by ED from the Social Security Administration
(SSA).
discretionary debt to income rate (dDTE) which requires that the estimated median annual loan payment
of a particular cohort of graduates not exceed 20 percent of the estimated discretionary income of those
graduates. Discretionary income for this purpose is the higher of the mean or median annual earnings of
the cohort less 1.5 times the poverty guideline for a single person as determined by the U.S. Department
of Health and Human Services.
25
Measurement Standards
The gainful employment rule provides a three tier rating system of pass, zone and fail:
•
Pass: Program meets at least one of the DE metrics.
• Zone: Program passes neither DE metric, but is in the "zone" under at least one of the DE metrics, which
is defined as having an aDTE between eight and 12 percent or a dDTE between 20 and 30 percent. The
program's other metric may be failing.
•
Fail: Program fails both DE metrics, meaning the program has an aDTE greater than 12 percent and a
dDTE greater than 30 percent.
A program would become ineligible for Title IV if it fails both DE tests in two out of any three consecutive
years for which rates are calculated. In addition, any program that measures in the zone or has a combination of
zone/failing scores for four consecutive years would become ineligible for Title IV. The earliest a program could
lose eligibility would be in calendar year 2017, which is the earliest ED could publish a second set of final DE
rates. If a program loses eligibility or is voluntarily discontinued after receiving draft zone or failing DE rates, the
institution may not reestablish eligibility for that program or a substantially similar program, as defined in the
regulations, for a period of three years.
The rule includes a transition period, which varies in duration between five and seven years depending
on the length of the particular program. During the transition period, an institution's programs may be evaluated
using an alternative DE calculation that uses the debt incurred by a more recent cohort of graduates. The transition
period is intended to allow an institution to improve its DE rates by taking steps to reduce the debt of its recent
student cohorts; however, at least for the first year of the transition period, the calculation will still use debt incurred
by students who graduated before the rule took effect.
The rule provides an institution with the opportunity to challenge certain elements of the DE calculations.
However, such challenges will be subject to a compressed timeline. Challenges to the earnings calculations will
be extremely limited and likely involve considerable expense to the institution. The rule grants ED substantial
discretion to establish procedures, requirements and standards for the challenges.
The final rule, which took effect on July 1, 2015, is less favorable to us than the regulations originally
published in June 2011. In October 2016, ED issued to our schools draft versions of the first set of DE rates to be
issued under the new rule. Under these draft DE rates for the 2015 debt measure year, none of our programs had
failing rates. Nine of our 12 educational programs achieved passing rates, and the other three programs were in
the zone. The three programs in the zone are the Collision Repair, Automotive, and Motorcycle programs at our
Universal Technical Institute of Phoenix institution, which includes our MMI Phoenix, Arizona and Orlando,
Florida campuses and our Sacramento, California campus. All of the programs at our Universal Technical Institute
of Arizona and Universal Technical Institute of Texas institutions had passing draft DE rates. The draft DE rates
are subject to data challenges and to further adjustments before ED issues final versions of these rates and, therefore,
may be subject to change. The final DE rates are expected to be issued in early 2017. The next set of rates for the
2016 debt measure year is expected to be issued later in 2017, although we cannot predict with certainty when the
draft and final versions of the rates will be issued. With respect to future DE rates, we are not able to develop
reliable projections of our programs' performance under the final rule because we do not have access to the SSA
earnings data that is used in the calculations.
If a particular program ceased to be eligible for Title IV Program funding, in most cases it would not be
practical to continue offering that program under our current business model. In order to prevent this, we may have
to explore mitigation strategies which might include preemptively reducing program tuition in an attempt to ensure
compliance. Because we cannot calculate the exact impact of such action on a program's DE rates, we may
overestimate the required tuition reduction, which would have a negative impact on our tuition revenues.
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Conversely, we may underestimate the required tuition reduction, and fail to improve the program's DE rates,
which could result in the loss of Title IV eligibility as discussed above.
Certification
The rule requires an institution's most senior executive officer to certify, as a condition of continued Title
IV Program eligibility, that each of the institution’s eligible gainful employment programs satisfies certain new
ED certification requirements that focus primarily on the approval of the program by relevant regulatory or
governing bodies such as institutional accreditors and, if applicable, programmatic accreditors and state licensing
agencies.
Disclosure
The rule identifies up to 16 different items, as determined by ED, that institutions must disclose to
prospective students and the public about each of their programs, while providing ED the right to expand the list
as it deems necessary. Items that may be required include program cost, length, graduation rates, placement rates,
accreditation, mean and median student indebtedness and program cohort default rate. Institutions may be required
to aggregate or disaggregate disclosure data into multiple student cohorts such as graduates and non-graduates or
students enrolled in the program as offered in different formats or lengths. These disclosure requirements take
effect on January 1, 2017, until which time institutions must continue to comply with the existing disclosure
requirements previously described.
Reporting
The rule requires institutions to annually report to ED information required to calculate the DE rates and
certain potential disclosure items, including information about the institution's gainful employment programs, the
enrollment status of students in those programs and the debt incurred by those students.
Warnings
The rule requires institutions to provide disclosures to all prospective students prior to their signing an
enrollment agreement, obtain verification of receipt from the student and maintain historical records of such
verification. The rule further requires institutions to provide separate warnings with respect to any program that
ED identifies as in jeopardy of losing Title IV eligibility when the next set of DE rates becomes final. If required,
these warnings must be provided to all active and prospective students and the institution must maintain records
that document its efforts to distribute the warning. Warnings must include a number of elements including a
statement that the program has not met ED’s gainful employment standards and Title IV eligibility may be
terminated, options available to the student should Title IV eligibility be lost and guidance on the institution’s plans
to continue the program, offer refunds, or transfer credit should Title IV eligibility be lost. Based on our recently
issued draft DE rates for the 2015 debt measurement year, which may be subject to change before ED issues the
final rates, none of our programs are currently required to provide these separate warnings.
Defense to Repayment Regulations. On November 1, 2016, ED published final regulations in the Federal
Register regarding, among other things, the ability of borrowers to obtain discharges of their obligations to repay
certain Title IV loans and the circumstances that require institutions to provide letters of credit or other financial
protection to ED. The following is a summary of the key elements of the final rule.
Borrower Defense and Other Discharges
The new regulations establish amended procedures and standards for borrowers, either individually or as
a group, to assert through an ED-administered process a defense to the borrowers’ obligation to repay certain Title
IV loans first disbursed prior to July 1, 2017 based on certain acts or omissions of the institution that relate to the
making of the loan for enrollment at the school or the provision of educational services for which the loan was
provided that would give rise to a cause of action against the school.
27
The regulations also expand the types of defenses available for borrowers, either individually or as a
group, to assert through a new ED-administered process for loans first disbursed on or after July 1, 2017 based on
certain acts or omissions that relate to the making of a Direct Loan for enrollment at the school or the provision
of educational services for which the loan was provided and which fall into one of the following categories:
• The borrower, whether as an individual or as a member of a class, or a governmental agency, has
obtained against the school a nondefault, favorable contested judgment based on state or federal law
in a court of administrative tribunal.
• The institution failed to perform its obligations under the terms of a contract with the student.
• The school or any of its representatives or any institution, organization, or person with whom the
school has an agreement to provide educational programs, or to provide marketing, advertising,
recruiting or admissions services, made a substantial misrepresentation (as defined by ED regulations)
that the borrower reasonably relied on to the borrower’s detriment when the borrower decided to
attend, or to continue attending, the school or decided to take out a Direct Loan. The new rules also
expand the existing regulatory definition of a misrepresentation.
The regulations establish separate procedures for claims initiated for individual borrowers and claims
initiated for groups of borrowers as well as separate procedures in the event that the institution is open or closed.
The rules establish varying, borrower-favorable statutes of limitations for the initiation of claims and, in some
cases, impose an unlimited statute of limitations. The procedures provide for evaluation of the claims either by
an ED official or hearing official and provide for school participation in the process. The procedures in some cases
enable ED to consolidate borrower claims with common facts and to present the borrowers’ claims during the
process.
If the ED official or hearing official approves the borrower’s defense to repayment through the applicable
administrative process established in the proposed regulations, ED may discharge the borrower’s obligation to
repay some or all of the borrower’s student loans, may return to the borrower amounts already paid by the borrower
toward the discharged portion of the loan, and may initiate a separate proceeding to collect the discharged and
returned amounts from the institution.
Financial Protection Requirements
The new regulations revise the financial responsibility regulations to expand the list of actions or events
that would require an institution to provide ED with a letter of credit or other form of acceptable financial protection
and potentially be subject to other conditions and requirements. The specified list of events is extensive and includes
events that ED contends might result in actual or potential debts, liabilities or losses and other events that ED
contends might result in the institution being unable to meet all of its financial obligations and otherwise provide
the administrative resources necessary to comply with the Title IV programs. The new regulations require
institutions to notify ED and current and prospective students within specified timeframes of the occurrence of
one or more of these events.
With respect to events that might result in actual or potential debts, liabilities or losses, the new regulations
identify the following events that could result in ED deeming the institution to fail ED’s financial responsibility
standards and requiring a letter of credit or other form of acceptable financial protection and the acceptance of
other conditions or requirements:
•
the institution is required to pay any debt or incur any liability arising from a final judgment in a
judicial proceeding or from an administrative proceeding or determination, or from a settlement;
28
•
•
•
•
•
the institution is being sued in an action that has been pending for 120 days and that was brought by
a federal or state authority for financial relief on claims related to making a Direct Loan for enrollment
at the institution or the provision of educational services;
the institution is being sued in other litigation and the institution’s motion for summary judgment has
been denied or was not filed with the court;
the institution is closing any or all of its locations and is required by its accrediting agency to submit
a teach-out plan;
the institution has one or more gainful employment programs with gainful employment rates that
could result in the programs becoming ineligible based on their rates for the next award year; or
if the institution’s composite score is less than 1.5, any withdrawal of owner’s equity from the
institution occurs by any means, including by declaring a dividend, unless the transfer is to an entity
included in the affiliated entity group on whose basis the institution’s composite score was calculated.
If one or more of these events occur, ED recalculates the institution’s composite score by estimating the
amount of actual and potential losses resulting from the events and determining whether the recalculated composite
score is less than 1.0 and the institution fails the financial responsibility standards as a result. The regulations
establish severe rules for calculating and presuming the recognition of the potential losses that might arise from
the above-referenced events. For example, with certain exceptions, the regulations estimate the potential losses
from pending lawsuits to equal the amount of relief claimed in the complaint or in any final written demand letter
from the claimant. With respect to closing locations and to programs that could lose eligibility based on gainful
employment rates, the regulations estimate potential losses to equal the amount of Title IV funds received by the
institution for the location and programs during the most recently completed award year. For a withdrawal of
owner’s equity, the regulations estimate potential losses to equal the amount transferred to an entity other than the
institution.
The new regulations could require us to submit a letter of credit or other form of acceptable financial
protection and accept other conditions or requirements if we pay dividends to shareholders if our composite score
is less than 1.5 and the dividend amounts in combination with estimated losses associated with other events covered
by the rules would reduce our composite score below 1.0 as recalculated by ED. On June 24, 2016, we entered
into a Securities Purchase Agreement with Coliseum Holdings I, LLC, pursuant to which Coliseum purchased
shares of our Series A Preferred Stock. Under the related Certificate of Designations, dividends on the Series A
Preferred Stock accrue from the date of original issuance at a rate of 7.5% per annum on the liquidation preference
then in effect (Cash Dividend). If we do not declare and pay the dividend, the liquidation preference will be increased
to an amount equal to the liquidation preference in effect at the start of the applicable dividend period plus an
amount equal to such then applicable liquidation preference multiplied by 9.5% per annum (Accrued Dividend).
Cash Dividends, if declared, are payable semi-annually in arrears on September 30 and March 31, of each year.
If applicable, the Accrued Dividend will begin to accrue and be cumulative on the same schedule as set forth above
for Cash Dividends and will also be compounded on each applicable subsequent dividend date. Consequently, our
inability to pay dividends on a timely basis could increase the cost of paying those dividends when they are paid
in the future.
The regulations also identify the following events that ED contends might result in the institution being
unable to meet all of its financial obligations and otherwise provide the administrative resources necessary to
comply with the Title IV programs, and that could result in ED deeming the institution to fail ED’s financial
responsibility standards, thus requiring a letter of credit or other form of acceptable financial protection and the
acceptance of other conditions or requirements: failure to comply with the 90/10 Rule for the most recently
completed fiscal year; SEC warning that it may suspend trading on the institution’s stock; failure to file certain
reports with the SEC; the exchange on which the institution’s stock is traded notifying the institution that it is not
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in compliance with exchange requirements or that its stock is delisted; cohort default rates of at least 30 percent
for its two most recent rates; certain significant fluctuations in Title IV funding; certain citations for failure to
comply with state agency requirements; failure to comply with yet to be developed ED financial stress tests; high
annual dropout rates; placement of the institution on probation or issuance of a show-cause or similar action by
its accrediting agency; certain violations of loan agreements; expected or pending claims for borrower relief
discharges and certain other events that ED might identify as reasonably likely to have a material adverse effect
on the financial condition, business or results of operations of the institutions.
If ED deems the institution to fail the financial responsibility standards based on one or more of the
aforementioned events listed in the regulations or based on the institution’s failure to comply with other requirements
in the financial responsibility regulations, ED may permit the institution to continue participating in the Title IV
programs under a provisional certification and would require the institution to submit a letter of credit or other
form of financial protection, comply with the zone requirements and potentially accept other conditions or
restrictions. The regulations state that the letter of credit must equal 10 percent of the total amount of Title IV funds
received by the institution during its most recently completed fiscal year plus any additional amount that ED
determines is necessary to fully cover any estimated losses unless the institution demonstrates that the additional
amount if unnecessary to protect, or is contrary to, the Federal interest. The regulations state that ED maintains
the full amount of financial protection until ED determines that the institution has a composite score of 1.0 or
greater based on a review of the institution’s audited financial statements for the fiscal year in which all losses
from the aforementioned events have been fully recognized or if the recalculated composite score is 1.0 or greater
and the aforementioned events have ceased to exist.
Student Loan Repayment Rates
The new regulations require proprietary institutions with student loan repayment rates, as defined in the
regulations, below prescribed thresholds to provide an ED-prepared warning to prospective and enrolled students,
as well as placement of the warning on its website and in all promotional materials and advertisements.
Prohibition on Pre-Dispute Contractual Provisions
The new regulations prohibit the use and reliance upon certain contractual provisions regarding dispute
resolution processes, such as pre-dispute arbitration agreements or class action waivers, and require certain
notifications, contract provisions and disclosures by institutions regarding students’ ability to participate in certain
class action lawsuits or to initiate certain lawsuits instead of through arbitration. The rules require institutions to
submit to ED copies of certain records in connection with any claim filed in arbitration by or against the school
concerning a borrower defense claim and any claim filed in a lawsuit by the school against the student or by any
party against the school concerning a borrower defense claim.
The regulations have a general effective date of July 1, 2017.
The “90/10 Rule.” A for-profit institution loses its eligibility to participate in Title IV Programs if it
derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years as calculated under
a cash basis formula mandated by ED. The HEA and ED regulations set forth specific requirements for the
calculation of the Title IV Program revenue percentage, mandate expanded disclosure requirements in how an
institution presents the calculation and impose negative consequences if an institution exceeds the 90% limit in a
single fiscal year.
The HEA provides that an institution will lose its Title IV Program eligibility for a period of at least two
institutional fiscal years if it exceeds the 90% threshold for two consecutive institutional fiscal years. The loss of
such eligibility would begin on the first day following the conclusion of the second consecutive year in which the
institution exceeded the 90% limit and, as such, any Title IV Program funds already received by the institution and
its students during a period of ineligibility would have to be returned to ED or a lender, if applicable. Additionally,
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if an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification
for a period of at least two years, could impose other restrictions or conditions on the institution's Title IV eligibility,
and, under ED’s amended financial responsibility regulations that take effect on July 1, 2017, could conclude that
the institution lacks financial responsibility and is required to submit a letter of credit or other form of financial
protection.
The HEA sets specific standards for certain elements in the calculation of an institution’s percentage under
the 90/10 Rule, including, among other things, the treatment of institutional loans and revenue received from
students who are enrolled in educational programs that are not eligible for Title IV Program funding.
As of September 30, 2016, our institutions’ annual Title IV percentages as calculated under the 90/10 rule
ranged from approximately 71% to 74%. We regularly monitor compliance with this requirement to minimize the
risk that any of our institutions would derive more than the allowable maximum percentage of its revenue from
Title IV Programs for any fiscal year.
Federal Student Loan Defaults. To remain eligible to participate in Title IV Programs, institutions must
maintain federal student loan cohort default rates below specified levels. The cohort default rate includes borrowers
under the Federal Family Education Loan (FFEL) program, which was discontinued June 30, 2010, as well as the
DL program. ED calculates an institution’s cohort default rate on an annual basis. Under the current calculation,
the FFEL/DL cohort default rate is derived from student FFEL/DL borrowers who first enter loan repayment during
a federal fiscal year (FFY) ending September 30 and subsequently default on those loans within the two following
years; parent borrowers are excluded from the calculation. This represents a three-year measuring period. An
institution whose cohort default rate is 30% or more for three consecutive FFYs or greater than 40% for any given
FFY loses eligibility to participate in some or all Title IV Programs. This sanction is effective for the remainder
of the FFY in which the institution lost its eligibility and for the two subsequent FFYs. None of our institutions
had a three-year FFEL/DL cohort default rate of 30% or greater for 2013, 2012 or 2011, the three most recent FFYs
with published rates.
The following tables set forth the FFEL/DL cohort default rates for our institutions:
Institution
Three-Year Cohort Default Rates for
Cohort Years Ended September 30, (1)
2011
2012
2013
Universal Technical Institute of Arizona
Universal Technical Institute of Phoenix
Universal Technical Institute of Texas
14.5%
18.9%
18.6%
17.1%
18.9%
18.3%
18.8%
19.5%
21.6%
All proprietary postsecondary institutions
15.0%
15.8%
19.1%
(1) Based on information published by ED.
An institution whose three-year cohort default rate under the FFEL/DL program 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. As of September 30, 2016, all of our institutions were subject to delayed
disbursements. An institution whose cohort default rate under the FFEL/DL program is 30% or greater, but less
than or equal to 40%, for two of the three most recent federal fiscal years may be placed on provisional certification
status by ED for up to three years. None of our institutions are on provisional status with ED. An institution whose
two most recent official cohort default rates are 30 percent or greater may fail ED’s financial responsibility
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regulations as amended effective July 1, 2017 and be required to submit a letter of credit or other financial protection
and be subject to other conditions and restrictions.
Perkins Loan Defaults. An institution with a Perkins program cohort default rate that is greater than
15.0% for any federal award year, which is the twelve month period from July 1 through June 30, may be placed
on provisional certification. The Perkins cohort default rates for Universal Technical Institute of Texas was 12.9%
for students who were scheduled to begin repayment in the federal award year ended June 30, 2015, the most recent
federal award year reported by our institutions. The Perkins cohort default rate for Universal Technical Institute
of Arizona for the same period was 20% with 20 of 100 Perkins borrowers defaulting in this cohort period. The
Perkins cohort default rate for Universal Technical Institute of Phoenix was 35%, based on a composite of the three
prior award year’s data, as there were fewer than 30 borrowers applicable to the 2014-15 cohort. Although the
most recent Perkins cohort default rates are greater than 15% for Universal Technical Institute of Arizona and for
Universal Technical Institute of Phoenix, we have not been advised of any provisional certification status. If we
are placed on provisional certification status for any reason, ED will require us to obtain prior approval for changes
to our programs and locations and may more closely view any application we file for recertification, new locations,
new or revised educational programs, acquisitions of other institutions, increases in degree level or other significant
changes. Further, for an institution that is provisionally certified, ED may revoke the institution’s certification
without advance notice or advance opportunity to challenge the action.
An institution with a Perkins cohort default rate of 50% or greater for three consecutive federal award
years loses eligibility to participate in the Perkins program and must liquidate its loan portfolio. None of our
institutions had a Perkins cohort default rate of 50% or greater for any of the last three federal award years. ED
also will not provide any additional federal funds to an institution for Perkins loans in any federal award year in
which the institution’s Perkins cohort default rate is 25% or greater. None of our institutions has had its federal
Perkins funding eliminated for the past three federal award years. For the federal award year ended June 30, 2017,
as with the 12 preceding federal award years, ED will not disburse any new federal funds to any institutions for
Perkins loans due to federal appropriations limitations. In our 2016 fiscal year, we derived less than 1% of our
revenues from the Perkins program.
Financial Responsibility Standards. All institutions participating in Title IV Programs must satisfy
specific ED standards of financial responsibility. ED evaluates institutions for compliance with these standards
each year, based on the institution’s annual audited financial statements, as well as following a change of control
of the institution.
The institution’s financial responsibility is measured by its composite score which is calculated by ED
based on three ratios:
•
•
the equity ratio which measures the institution’s capital resources, ability to borrow and financial
viability;
the primary reserve ratio which measures the institution’s ability to support current operations from
expendable resources; and
•
the net income ratio which measures the institution’s ability to operate at a profit.
ED assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive
3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. ED then assigns
a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite
score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially
responsible without the need for further oversight. In addition to having an acceptable composite score, an institution
must, among other things, meet all of its 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
and not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements.
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If ED determines that an institution does not satisfy its financial responsibility standards, depending on the resulting
composite score and other factors, that institution may establish its financial responsibility on an alternative basis.
If an institution's composite score is below 1.5, but is at least 1.0, the institution is in a category classified
by ED as the zone. Under ED regulations, institutions in the zone solely because their composite score is less than
1.5 are still considered to be financially responsible, but require additional oversight by ED in the form of cash
monitoring and other participation requirements. Institutions in the zone typically are permitted by ED to continue
to participate in the title IV programs under one of two alternatives: 1) the “Zone Alternative” under which an
institution is required to make disbursements to students under a payment method other than ED’s standard
repayment, typically the Heightened Cash Monitoring 1 (HCM1) payment method; to notify ED within 10 days
after the occurrence of certain oversight and financial events and to comply with other operating conditions imposed
by ED or 2) submit a letter of credit to ED equal to at least 50 percent of the Title IV funds received by the institutions
during the most recent fiscal year. ED permits an institution to participate under the “Zone Alternative” for a period
of up to three consecutive fiscal years. Under the “Zone Alternative” notification requirement under regulations
in effect until July 1, 2017, the institution must provide timely information to ED regarding any of the following
oversight and financial events:
•
•
•
•
•
•
•
any adverse action, including a probation or similar action, taken against the institution by its accrediting
agency, state authority or other federal agency;
any event that causes the institution to realize any liability that was noted as a contingent liability in the
institution's most recent audited financial statements;
any violation by the institution of any loan agreement;
any failure of the institution to make a payment in accordance with its debt obligations that results in a
creditor filing suit to recover funds under those obligations;
any withdrawal of owner's equity/net assets from the institution by any means, including by declaring a
dividend;
any extraordinary losses as defined in accordance with generally accepted accounting principles; or
any filing of a petition by the institution for relief in bankruptcy court.
Under the new regulations that take effect on July 1, 2017, the list of information that an institution must
provide timely to ED will change to the following: any event that causes the institution, or a related entity, to
realize any liability that was noted as a contingent liability in the institution’s or related entity’s most recent audited
financial statements or any losses that are unusual in nature and infrequently occur or both as defined in accordance
with certain specified accounting standards. The institution also will be required to notify ED of certain other
events described in the new Defense to Repayment regulations. See “Regulation of Federal Student Financial Aid
Programs - Defense To Repayment Regulations.” ED could impose a letter of credit or other conditions or
requirements upon us in response to the reporting of any oversight or financial events.
Under the HCM1 payment method, the institution is required to make Title IV disbursements to eligible
students and parents before it requests or receives funds for the amount of those disbursements from ED. As long
as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw
down funds through ED’s electronic system for grants management and payments for the amount of disbursements
made to eligible students. Unlike the Heightened Cash Monitoring 2 (HCM2) or reimbursement payment methods,
the HCM1 payment method typically does not require institutions to submit documentation to ED and wait for ED
approval before drawing down Title IV funds. ED may place an institution that is in the zone on the HCM2 or
reimbursement methods of payment. Under regulations published on October 30, 2015 with an effective date of
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July 1, 2016, an institution on the HCM1, HCM2 or reimbursement payment methods must pay any credit balances
due to a student or parent before drawing down funds from ED for the amount of disbursements made to the student
or parent.
Under current regulations in effect until July 1, 2017, if an institution's composite score is below 1.0, the
institution is considered by ED to lack financial responsibility. If ED determines that an institution does not satisfy
ED's financial responsibility standards, depending on its composite score and other factors, that institution may
establish its financial responsibility on an alternative basis by, among other things:
•
•
posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received
by the institution during its most recently completed fiscal year, or
posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program
funds, accepting provisional certification for a period of no more than three years, complying with
additional ED notification and operating requirements and conditions and agreeing to receive Title
IV Program funds under an arrangement other than ED's standard advance funding arrangement.
Under new regulations that take effect on July 1, 2017, ED may increase this amount to account for
ED’s determination of the additional amount of financial protection needed to fully cover any
estimated losses.
If an institution is unable to establish financial responsibility on an alternative basis, the institution may be subject
to financial penalties, restrictions on operations and loss of external financial aid funding. See "Risk Factors"
included elsewhere in this Report on Form 10-K for additional information. If an institution does not establish its
financial responsibility by the end of the period for which ED provisionally certified the institution, ED may
continue to provisionally certify the institution, but may require one or more persons or entities that exercise
substantial control over the institution, as defined by ED regulations, to provide ED with financial protection for
an amount determined by ED and to be jointly and severally liable for any liabilities that may arise from the
institution’s participation in the Title IV programs.
ED has published final regulations that amend the financial responsibility regulations to expand the list
of actions or events that require an institution to provide ED with a letter of credit or other form of acceptable
financial protection. The regulations also, among other things, may increase the amount of the letter of credit or
other form of financial protection that an institution must provide to ED if the institution has a composite score
below 1.0, no longer qualifies for the Zone Alternative, or does not comply with other applicable requirements of
the financial responsibility regulations. These new requirements are scheduled to become effective on July 1, 2017.
See “Regulation of Federal Student Financial Aid Programs - Defense To Repayment Regulations.”
ED has historically evaluated the financial condition of our institutions on a consolidated basis based on
the financial statements of Universal Technical Institute, Inc. as the parent company. ED’s regulations permit ED
to examine the financial statements of Universal Technical Institute, Inc., the financial statements of each institution
and the financial statements of any related party. As anticipated, upon review of our 2015 financial statements and
composite score, ED communicated that we could elect the "Zone Alternative" option described above or post a
letter of credit representing 50% of the Title IV Program funds received by us during 2015. We elected the "Zone
Alternative" option and began disbursing funds under the HCM1 method on October 10, 2016 and are now subject
to the “Zone Alternative” notification requirement described above. In connection with the issuance of our Series
A Convertible Preferred Stock (Series A Preferred Stock) in June 2016, we received a request from ED to provide
a monthly student roster and a biweekly cash flow projection. ED extended this requirement as part of the "Zone
Alternative" option outlined above. We began complying with these reporting requirements in July 2016.
For our 2016 fiscal year, we calculated our composite score to be 1.7. However, the composite score
calculations and resulting requirements imposed on our institutions are subject to determination by ED once it
receives and reviews our audited financial statements. Moreover, ED may recalculate our composite score to
account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to
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Repayment Regulations. See “Regulation of Federal Student Financial Aid Programs - Defense To Repayment
Regulations.” If ED determines that our composite score is 1.5 or higher, our composite score would be high
enough for our institutions to be deemed financially responsible and could result in ED no longer requiring us to
comply with the "Zone Alternative" requirements or the requirement to use the HCM1 payment method. Such
determination would be subject to the absence of other factors supporting these requirements.
Return of Title IV Funds. An institution participating in Title IV Programs must calculate the amount
of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational
programs before completing them. The institution must return those unearned funds to ED or the appropriate
lending institution in a timely manner, which is generally within 45 days from the date the institution determines
that the student has withdrawn.
If an institution is cited in an audit or program review for returning Title IV Program funds late for 5%
or more of the students in the audit or program review sample, the institution must post a letter of credit in favor
of ED in an amount equal to 25% of the total Title IV Program funds that should have been returned in the previous
fiscal year. Our 2016 Title IV compliance audits did not cite any of our institutions for exceeding the 5% late
payment threshold.
Institution Acquisitions. When a company acquires an institution that is eligible to participate in Title
IV Programs, that institution undergoes a change of ownership resulting in a change of control as defined by ED.
Upon such a change of control, an institution’s eligibility to participate in Title IV Programs is generally suspended
until it has applied for recertification by ED as an eligible institution under its new ownership, which requires that
the institution also re-establish its state authorization and accreditation. ED may temporarily and provisionally
certify an institution seeking approval of a change of control under certain circumstances while ED reviews the
institution’s application. The time required for ED to act on such an application may vary substantially. ED’s
recertification of an institution following a change of control is typically on a provisional basis. Our expansion
plans are based, in part, on our ability to acquire additional institutions and have them certified by ED to participate
in Title IV Programs following affirmation of state licensure and accreditation. Although we believe we will be
able to obtain all necessary approvals from ED, ACCSC and the applicable state agencies for our expansion plans,
we cannot ensure that such approvals will be obtained at all or in a timely manner that will not delay or reduce the
availability of Title IV Program funds for our students.
Change of Control. In addition to institution acquisitions, other types of transactions can also cause a
change of control. ED and most state education agencies and ACCSC have standards pertaining to the change of
control of institutions, but these standards are not uniform. ED’s regulations describe some transactions that
constitute a change of control, including the transfer of a controlling interest in the voting stock of an institution
or the institution’s parent corporation. With respect to a publicly-traded corporation, ED regulations provide that
a change of control occurs in one of two ways: (i) if there is an event that would obligate the corporation to file a
Current Report on Form 8-K with the SEC disclosing a change of control or (ii) if the corporation has a “Controlling
Stockholder”, as defined in ED regulations, that owns or controls through agreement at least 25% of the total
outstanding voting stock of the corporation and is the largest stockholder of the corporation, and that stockholder
ceases to own at least 25% of such stock or ceases to be the largest stockholder. These change of control standards
are subject to interpretation by ED. Most of the states and our accrediting commission include the sale of a
controlling interest of common stock in the definition of a change of control. A change of control under the definition
of these agencies would require any affected institution to have its state authorization and accreditation reaffirmed
by that agency. The requirements to obtain such reaffirmation from the states and our accrediting commission
vary widely.
A change of control could occur as a result of future transactions in which our company or our institutions
are involved. Some corporate re-organizations and some changes in the board of directors are examples of such
transactions. Additionally, the potential adverse effects of a change of control could influence future decisions by
us and our stockholders regarding the sale, purchase, transfer, issuance or redemption of our stock. We have a
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stockholder rights agreement that our Board of Directors authorized on June 29, 2016 to protect against any potential
future use of coercive or abusive takeover techniques that could result in an uncoordinated change in control and
to ensure that our stockholders are not deprived of the opportunity to realize the full and fair value of their investment.
This agreement, which expires on June 28, 2017, mitigates the risk of any person or group acquiring beneficial
ownership of 15% or more of our outstanding common stock, or, in the case of any person or group that already
owns 15% or more of the outstanding common stock, an additional 0.25%.
If a future transaction would result in a change of control of our company or our institutions, we would
pursue all necessary approvals from ED, ACCSC and the applicable state education agencies. However, we cannot
ensure that all such approvals can be obtained at all or in a timely manner that will not delay or reduce the availability
of Title IV Program funds for our students.
Opening Additional Institutions and Adding Educational Programs. For-profit educational institutions
must be authorized by their state education agencies, accredited by an accrediting commission recognized by ED
and be fully operational for two years before applying to ED to participate in Title IV Programs. However, an
institution that is certified to participate in Title IV Programs may establish an additional location and apply to
participate in Title IV Programs at that location without regard to the two-year requirement, if such additional
location satisfies all other applicable ED eligibility requirements. Our expansion plans are based, in part, on our
ability to open new campuses as additional locations of our existing institutions and take into account ED’s approval
requirements. Currently, all of our institutions are eligible to offer Title IV Program funding.
A student may use Title IV Program funds only to pay the costs associated with enrollment in an eligible
educational program offered by an institution participating in Title IV Programs. Our expansion plans are based,
in part, on our ability to add new educational programs at our existing institutions. Generally, an institution that is
eligible to participate in Title IV Programs, and is not provisionally certified, may add a new educational program
without ED approval if the new program is licensed by the applicable state agency, accredited by an agency
recognized by ED, prepare students for gainful employment in the same or related occupation as an educational
program that ED has already approved, and meets certain other requirements. For programs required to lead to
gainful employment in a recognized occupation, which includes all of our programs, the institution must also
certify that the new program:
•
•
•
is approved by a recognized accrediting agency or is otherwise included in the institution's
accreditation by its recognized accrediting agency;
is programmatically accredited if such accreditation is required by a federal government entity
or by a governmental entity in the state in which the institution is located or in which the institution
is otherwise required to obtain state approval; and
in the state in which the institution is located, or in which the institution is otherwise required
to obtain state approval, satisfies the applicable education prerequisites for professional licensure
or certification requirements in that state so that a student who completes the program and seeks
employment in that state qualifies to take any licensure or certification examination that is needed
for the student to practice or find employment in an occupation that the program prepares students
to enter.
Some of the state education agencies and ACCSC also have requirements that may affect our institutions’
ability to open a new location, establish an additional location of an existing institution or begin offering a new or
revised educational program. We do not believe that these standards will create significant obstacles to our
expansion plans.
Administrative Capability. ED assesses the administrative capability of each institution that participates
in Title IV Programs under a series of separate standards listed in the regulations. Failure to satisfy any of the
standards may lead ED to find the institution ineligible to participate in Title IV Programs, require the institution
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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.
Eligibility and Certification Procedures. The HEA specifies the manner in which ED reviews institutions
for eligibility and certification to participate in Title IV Programs. Every educational institution seeking Title IV
Program funding for its students must be certified to participate and is required to periodically renew this
certification. Each institution must apply to ED for continued certification to participate in Title IV Programs
before its current term of certification expires, or if it undergoes a change of control. Terms of certification are
typically six years, but can be three years or shorter. Furthermore, an institution may come under ED review if it
expands its activities in certain ways such as opening an additional location or raising the highest academic credential
it offers. The Program Participation Agreement (PPA) document serves as ED’s formal authorization of an
institution and its associated additional locations to participate in Title IV Programs for a specified period of time.
Universal Technical Institute of Arizona and Universal Technical Institute of Phoenix were last recertified in October
2010 and entered into new PPAs with ED which expired on June 30, 2016. In accordance with ED guidance, we
submitted materially complete applications for recertification prior to the June 30, 2016 expiration, allowing these
institutions to continue to fully participate until ED makes a determination of recertification. Universal Technical
Institute of Texas was recertified in February 2012 and entered into a new PPA with ED which will expire March
31, 2018.
Compliance with Regulatory Standards and Effect of Regulatory Violations. Our institutions are subject
to audits and program compliance reviews by various external agencies, including ED, ED’s Office of Inspector
General, state education agencies, student loan guaranty agencies, the VA and ACCSC, as well as other federal
and state agencies. Each of our institutions’ administration of Title IV Program funds must also be audited annually
by independent accountants and the resulting audit report submitted to ED for review. If ED or another regulatory
agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision
of the HEA or ED’s regulations, that institution could be required to repay such funds and could be assessed an
administrative fine. ED could also transfer the institution from the advance method of receiving Title IV Program
funds to a cash monitoring or reimbursement system, which could negatively impact cash flow at an institution.
Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a
proceeding by ED to fine the affected institution or to limit, suspend or terminate the participation of the affected
institution in Title IV Programs. Generally, such a termination extends for 18 months before the institution may
apply for reinstatement of its participation.
In April 2015, ED completed an ordinary course program review of our administration of the Title IV
programs in which we participate for our Avondale, Arizona campus and additional locations of that campus. The
site visit covered the 2013-2014 and 2014-2015 award years. We have not received the initial report from ED
regarding this matter.
As previously disclosed, during a review of our methodology for assessing compliance with the 90/10
Rule, we determined that it would be appropriate to revise the manner in which we treat certain stipends, primarily
those awarded to recipients of veterans benefits. The revision, which did not impact our current or historical
compliance with the 90/10 rule, related to the application of technical regulatory guidance in a circumstance where
a student has multiple sources of tuition funding including Title IV funds and a portion of those funds is used as
a stipend. In August 2015, we provided this information to ED and requested guidance from ED on any additional
procedures they might require. We received a letter from ED in September 2015 requesting additional
documentation in connection with revisions to our methodology for performing prior year 90/10 calculations. We
provided the requested documentation in September 2015 and have not received a further response from ED.
There is no ED proceeding pending to fine any of our institutions or to limit, suspend or terminate any
of our institutions' participation in Title IV Programs, and we have no written notice that any such proceeding is
currently contemplated. Violations of Title IV Program requirements could also subject us or our institutions to
other civil and criminal penalties.
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ITEM 1A. RISK FACTORS
We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions
relevant to our business. These are factors that, individually or in the aggregate, could cause our 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. You should understand that it is not
possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete
discussion of all potential risks or uncertainties. You should consider carefully the risks and uncertainties described
below in addition to other information contained in this Report on Form 10-K, including our consolidated financial
statements and related notes.
Risks Related to Our Industry
Failure of our schools to comply with the extensive regulatory requirements for school operations could result
in financial requirements or penalties, restrictions on our operations and loss of external financial aid funding.
In 2016, we derived approximately 72% of our revenues, on a cash basis, from Title IV Programs,
administered by ED. To participate in Title IV Programs, an institution must receive and maintain authorization
by the appropriate state agencies, be accredited by an accrediting commission recognized by ED and be certified
as an eligible institution by ED. As a result, our institutions are subject to extensive regulation by the state agencies,
ACCSC and ED. Our institutions also are subject to the requirements of other federal and state regulatory agencies.
These regulatory requirements cover the vast majority of our operations, including our educational programs,
facilities, instructional and administrative staff, administrative procedures, marketing, recruiting, financial
operations and financial condition. These regulatory requirements also affect our ability to acquire, expand or
open additional institutions or campuses, add new, or expand our existing educational programs and change our
corporate structure and ownership. Most ED requirements are applied on an institutional basis, with an “institution”
defined by ED as a main campus and its additional locations, if any. Under ED’s definition, we have three such
institutions. The state agencies, ACCSC and ED periodically revise their requirements and modify their
interpretations of existing requirements. ED has imposed new regulatory requirements, such as the gainful
employment regulations, and proposed the creation of additional regulatory requirements, such as the defense to
repayment regulations and the expanded financial responsibility regulations, that apply to our schools. See "Risks
Related to Our Industry - Compliance with the Title IV Program Integrity regulations, gainful employment
regulations and ongoing negotiated rulemaking could materially and adversely affect our business" and “Risks
Related to Our Industry - Failure to maintain eligibility to participate in Title IV Programs could materially and
adversely affect our business - Financial Responsibility Standards.”
If our institutions failed to comply with any of these regulatory requirements, our regulatory agencies
could impose monetary penalties; bring litigation against us; place limitations on our schools’ operations, such as
restricting our ability to recruit or enroll students within certain states or imposing letter of credit requirements;
terminate our schools’ ability to grant degrees and diplomas; revoke our schools’ accreditation; or terminate our
schools’ eligibility to receive Title IV Program funds, each of which could adversely affect our cash flows, results
of operations and financial condition, and impose significant operating restrictions upon us. Further, ED and other
regulators have increased the frequency and severity of their enforcement actions against postsecondary schools
which have resulted in the imposition of material liabilities, sanctions, letter of credit requirements and other
restrictions and, in some cases, resulted in the loss of schools’ eligibility to receive Title IV funds or in closure of
the schools. We cannot predict with certainty how all of these regulatory requirements will be applied or whether
each of our schools will be able to comply with all of the requirements in the future. We believe that we have
described the most significant regulatory risks that apply to our schools in the following paragraphs.
38
Failure to maintain eligibility to participate in Title IV Programs could materially and adversely affect our
business.
To participate in Title IV Programs, an institution must be authorized to offer its programs by the relevant
state education agencies, be accredited by an accrediting commission recognized by ED and be certified as eligible
by ED. The substantial amount of federal funds disbursed through Title IV Programs, the large number of students
and institutions participating in those programs and instances of fraud and abuse have prompted ED to exercise
significant regulatory oversight over institutions participating in Title IV Programs. Accrediting commissions and
state agencies also oversee compliance with both their respective standards and with Title IV Program requirements.
As a result, each of our institutions is subject to detailed oversight and review and must comply with a complex
framework of frequently changing laws and regulations and subjective regulatory interpretation of these obligations
by various regulating entities. Because ED periodically revises its regulations and changes its interpretation of
existing laws and regulations, we cannot predict with certainty how Title IV Program requirements will be applied
in all circumstances. Additionally, given the complex nature of the regulations, the fact that they are subject to
multiple interpretations, a stated department policy of providing limited or no interpretive guidance and the large
volume of Title IV transactions in which we are involved, it is reasonable to conclude that, from time to time, in
the conduct of our business, we may inadvertently violate such regulations. In such an event, remedial action may
be necessary, regulatory proceedings could occur and regulatory penalties could be assessed.
Significant factors relating to Title IV Program eligibility that could adversely affect us include the
following:
State Authorization
A campus that grants degrees or diplomas must be authorized to offer postsecondary education programs
in that state by the relevant education agency of the state in which it is located. Requirements for authorization
vary substantially among states. State authorization is also required for students to be eligible for funding under
Title IV Programs. Loss of state authorization by any of our campuses from the education agency of the state in
which the campus is located would end that campus’ eligibility to participate in Title IV Programs and could cause
us to close the campus, which could have a material adverse effect on our cash flows, results of operations and
financial condition. See “Business - Regulatory Environment - State Authorization and Regulation” included
elsewhere in this Report on Form 10-K for additional information.
Accreditation
A school must be accredited by an accrediting commission recognized by ED in order to participate in
Title IV Programs. Loss of institutional accreditation by any of our institutions (or of any institution that we may
acquire or open in the future) would end that institution’s participation in Title IV Programs and could cause us to
close the institution, or seek a new accrediting entity. If an accrediting agency that accredits one of our institutions
(or an institution that we may acquire or open in the future) loses its ED recognition, ED may provisionally certify
the institution to continue participating in the Title IV Programs for a period of up to 18 months during which time
the institution may attempt to obtain accreditation from another ED-recognized accrediting agency. Moreover,
even if ED provisionally certifies the institution for up to 18 months, the loss of ED recognition by an institution’s
accrediting agency could result in a more immediate loss of the institution’s state authorization and, in turn, loss
of Title IV eligibility, programmatic accreditation, or eligibility to participate in certain federal or state financial
assistance programs if accreditation by an ED-recognized accrediting agency is a precondition to such authorization,
accreditation or eligibility.
The loss of accreditation by any of our current or future institutions, or the loss of ED recognition of an
institution’s accrediting agency, could have a material adverse effect on our cash flows, results of operations and
financial condition. See “Business - Regulatory Environment - Accreditation” included elsewhere in this Report
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on Form 10-K for additional information. A change in accreditation to a more restrictive or monitored status could
restrict our ability to add new programs, open new campuses or increase recruitment activity.
The “90/10 Rule”
Under the “90/10 Rule,” a for-profit institution loses its eligibility to participate in Title IV Programs if
it derives more than 90% of its revenue from those programs for two consecutive institutional fiscal years, under
a cash-basis calculation mandated by ED. The period of ineligibility covers at least the next two succeeding fiscal
years, and any Title IV Program funds already received by the institution and its students during the period of
ineligibility would have to be returned to ED. If an institution exceeds the 90% level for a single year, ED will
place the institution on provisional certification for a period of at least two years and could impose other restrictions
or conditions on the institution's Title IV eligibility, including the requirement to submit to ED a letter of credit or
other form of financial protection under the new Defense to Repayment regulations. If we are placed on provisional
certification status for any reason, ED will require us to obtain prior approval for changes to our programs and
locations and may more closely review any application we file for recertification, new locations, new educational
programs, revisions to existing educational programs, acquisitions of other schools, increases in degree level or
other significant changes. Furthermore, for an institution that is provisionally certified, ED may revoke the
institution’s certification without advance notice or advance opportunity to challenge the action. In our 2016 fiscal
year, under the regulatory formula prescribed by ED, each of our institutions derived approximately 71% to 74%
of its revenues from Title IV Programs.
We received a letter from ED in September 2015 requesting additional documentation in connection with
revisions to our methodology for performing prior year 90/10 calculations. We provided the requested
documentation in September 2015 and have not received a further response from ED. While the revisions did not
cause any of our institutions to exceed the 90% revenue threshold, it is possible that ED may take other actions
against our institutions or require us to provide additional information. See “Business - Regulatory Environment
- Regulation of Federal Student Financial Aid Programs - the '90/10 Rule'” included elsewhere in this Report on
Form 10-K for additional information.
Multiple legislative proposals have been introduced in Congress that would increase the requirements of
the 90/10 Rule, such as reducing the 90% maximum under the rule to 85% and/or including military and veterans'
funding in the 90% portion of the calculation. If any of our institutions loses eligibility to participate in Title IV
Programs, such a loss would adversely affect our students’ access to Title IV Program funds they need to pay their
educational expenses, which could reduce our student population and would have a material adverse effect on our
cash flows, results of operations and financial condition.
Federal Student Loan Defaults
An institution may lose its eligibility to participate in some or all Title IV Programs if its former students
default on the repayment of their federal student loans in excess of specified levels. Based upon the most recent
student loan default rates published by ED, none of our institutions have federal student loan default rates that
exceed the specified levels. If any of our institutions loses eligibility to participate in Title IV Programs because
of high student loan default rates, such a loss would adversely affect our students’ access to various Title IV Program
funds, which could reduce our student population and would have a material adverse effect on our cash flows,
results of operations and financial condition. See “Business - Regulatory Environment - Regulation of Federal
Student Financial Aid Programs - Federal Student Loan Defaults” included elsewhere in this Report on Form 10-
K for additional information.
Financial Responsibility Standards
To participate in Title IV Programs, an institution must satisfy specific measures of financial responsibility
prescribed by ED or post a letter of credit in favor of ED and possibly accept other conditions on its participation
40
in Title IV Programs. The operating conditions that may be placed on a school that does not meet the standards
of financial responsibility include being transferred from the advance payment method of receiving Title IV Program
funds to either the reimbursement or the heightened cash monitoring system, which could result in a significant
delay in the institution’s receipt of those funds, require the institution to pay credit balances due to students and
parents before drawing down funds from ED for the amount of disbursements made to the student or parent, and
increased administrative costs related to those funds. See “Business - Regulatory Environment - Regulation of
Federal Student Financial Aid Programs - Financial Responsibility Standards” included elsewhere in this Report
on Form 10-K for additional information. ED has proposed regulations that would amend the financial responsibility
regulations to expand the list of actions or events that would require an institution to provide ED with a letter of
credit or other form of acceptable financial protection. See “Regulation of Federal Student Financial Aid Programs
- Defense To Repayment Proposed Regulations” included elsewhere in this Report on Form 10-K for additional
information.
ED has historically evaluated the financial condition of our institutions on a consolidated basis based on
the financial statements of Universal Technical Institute, Inc. as the parent company. ED’s regulations permit ED
to examine the financial statements of Universal Technical Institute, Inc., the financial statements of each institution
and the financial statements of any related party. As anticipated, upon review of our 2015 financial statements and
composite score, ED communicated that we could elect the "Zone Alternative" option described previously or post
a letter of credit representing 50% of the Title IV Program funds received by us during 2015. We elected the "Zone
Alternative" option and began disbursing funds under the HCM1 method on October 10, 2016.
For our 2016 fiscal year, we calculated our composite score to be 1.7. However, the composite score
calculations and resulting requirements imposed on our institutions are subject to determination by ED once it
receives and reviews our audited financial statements. Moreover, ED may recalculate our composite score to
account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to
Repayment Regulations. See “Regulation of Federal Student Financial Aid Programs - Defense To Repayment
Regulations.” If ED determines that our composite score is 1.5 or higher, our composite score would be high
enough for our institutions to be deemed financially responsible and could result in ED no longer requiring us to
comply with the "Zone Alternative" requirements or the requirement to use the HCM1 payment method. Such
determination would be subject to the absence of other factors supporting these requirements.
ED has not required us currently to post a letter of credit on behalf of any of our schools. ED has required
us to provide certain information on a regular basis following our recent issuance of preferred stock. ED concluded
that the transaction did not constitute a change in ownership resulting in a change of control requiring ED approval,
but did require us to provide 13-week projected cash flow statements every two weeks and to provide a roster of
our current students on a monthly basis. We began providing this information to ED on a regular basis on July 15,
2016.
We may be required to post letters of credit or to comply with limitations on our Title IV participation
in the future, which could increase our costs of regulatory compliance or change the timing of receipt of Title IV
Program funds. The new Borrower Defense to Repayment regulations expand the list of events or circumstances
that could result in a requirement that we submit a letter of credit and that may increase the amount of letters of
credit that might be required under the regulations. See “Regulation of Federal Student Financial Aid Programs
- Defense To Repayment Regulations” included elsewhere in this Report on Form 10-K for additional information.
ED has imposed material letters of credit and limitations on some schools and also has denied the eligibility of
other schools to continue participating in the Title IV Programs. Our inability to obtain a required letter of credit
or the imposition of other limitations on our participation in Title IV Programs could limit or result in the loss of
our students’ access to Title IV Program funds, which could reduce our student population and could have a material
adverse effect on our cash flows, results of operations and financial condition.
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Return of Title IV Funds
A school participating in Title IV Programs must correctly calculate and return funds received for students
who withdraw before completing their educational programs whose aid exceeds the amount earned under Title IV
Program guidelines. Returns must be completed in a timely manner, generally within 45 days of the date the school
determines that the student has withdrawn. If the unearned funds are not properly calculated or timely returned,
we may be required to post a letter of credit in favor of ED, pay interest on the late repayment of funds, or be
otherwise sanctioned by ED, which could increase our cost of regulatory compliance and adversely affect our
results of operations. Additionally, the failure to timely return Title IV Program funds also could result in the
termination of eligibility to receive such funds going forward or the imposition of other sanctions. Any of these
results could have a material adverse effect on our cash flows, results of operations and financial condition. Given
the complex nature of the regulations applicable to Title IV refunds and the fact they are subject to multiple
interpretations, and the large volume of such transactions in which we are involved, it is reasonable to conclude
that, from time to time, in the conduct of our business, we may inadvertently violate such regulations. In such an
event, remedial actions may be necessary, regulatory proceedings could occur and regulatory penalties could be
assessed.
Administrative Capability
ED regulations specify extensive criteria an institution must satisfy to establish that it has the requisite
“administrative capability” to participate in Title IV Programs. These criteria require, among other things, that the
institutions:
•
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•
•
•
•
•
•
•
•
•
•
comply with all Title IV Program regulations;
have capable and sufficient personnel to administer Title IV Programs;
have acceptable methods of defining and measuring the satisfactory academic progress of its students;
administer Title IV Programs with adequate checks and balances in its system of internal controls
over financial reporting;
divide the function of authorizing and disbursing or delivering Title IV Program funds so that no
office has the responsibility for both functions;
establish and maintain records required under Title IV Program regulations;
develop and apply an adequate system to identify and resolve discrepancies in information from
sources regarding a student’s application for financial aid under Title IV Programs;
not have a student loan cohort default rate above specified levels;
refer to the Office of the Inspector General any credible information indicating that any applicant,
student, employee or agent of the institution has been engaged in any fraud or other illegal conduct
involving Title IV Programs;
not be, and not have any principal or affiliate who is, debarred or suspended from federal contracting
or engaging in activity that is the cause of debarment or suspension;
provide adequate financial aid counseling to its students;
show no significant problems that affect the administrative ability of the institution;
42
•
•
•
develop and follow procedures to evaluate the validity of a student's high school completion;
timely submit all reports and financial statements required by the regulations; and
not otherwise appear to lack administrative capability.
If an institution fails to satisfy any of these criteria, ED may, among other things:
•
•
•
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require the repayment of Title IV Program funds;
impose a less favorable payment system for the institution’s receipt of Title IV Program funds;
place the institution on provisional certification status; or
commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the
institution in Title IV Programs, or decline to renew the institution’s program participation agreement.
Moreover, ED could take one or more of the actions identified above based on an institution’s
noncompliance with ED requirements or the pendency of an ongoing audit or review even if ED does not conclude
that the institution lacks administrative capability. If we are placed on provisional certification status for any
reason, ED will require us to obtain prior approval for changes to our programs and locations and may more closely
review any application we file for recertification, new locations, new educational programs, revisions to existing
educational programs, acquisitions of other schools, increases in degree level or other significant changes.
Furthermore, for an institution that is provisionally certified, ED may revoke the institution’s certification without
advance notice or advance opportunity to challenge the action.
If we fail to maintain administrative capability as defined by ED or otherwise fail to comply with ED
requirements, we could lose our eligibility to participate in Title IV Programs or have that eligibility adversely
conditioned, which could have a material adverse effect on our cash flows, results of operations and financial
condition.
Compliance with the Title IV Program Integrity regulations, gainful employment regulations and ongoing
negotiated rulemaking could materially and adversely affect our business.
Since the publication of the program integrity regulations in 2010, ED has issued interpretive guidance
on the regulations in the form of multiple Dear Colleague Letters and electronic announcements to institutions.
The letters and announcements provide sub-regulatory guidance on certain aspects of the regulations, which assists
institutions with understanding the regulations in these areas. The laws and regulations governing certain of the
requirements do not establish clear criteria for compliance, and ED has indicated that they do not intend to provide
additional guidance on certain topics. In particular, the elimination of the 12 safe harbors regarding the incentive
compensation prohibition significantly impacted our business. ED published guidance in November 2015 that
eliminated certain restrictions on incentive compensation for admissions representatives. Specifically, ED
reconsidered its previous interpretation and stated that its regulations do not prohibit compensation for admissions
representatives that is based upon students’ graduation from, or completion of, educational programs.
Compensation based on enrolling students, however, continues to be prohibited. For a description of additional
information regarding these regulatory changes, see “Business - Regulatory Environment - Regulation of Federal
Student Financial Aid Programs - Incentive Compensation” included elsewhere in this Report on Form 10-K. We
have begun making adjustments to the compensation practices for our admissions representatives which we believe
will be compliant with ED's November 2015 guidance. The transition period for the new compensation structure
will continue through calendar year 2018. We will continue to evaluate other compensation options under these
regulations and guidance.
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ED published the final gainful employment rule on October 31, 2014, which took effect on July 1, 2015.
The final rule maintains the debt to earning (DE) metrics and disclosure requirements published in ED’s March
2014 proposed rule. In addition to the DE metrics, the final rules include requirements for program certifications,
reporting and disclosure of program information and warnings. For a summary of the final rules, see “Business -
Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Gainful Employment” included
elsewhere in this Report on Form 10-K.
Compliance with final rules could have a material adverse effect on the manner in which we conduct our
business and our results of operations. In October 2016, ED issued to our schools draft versions of the first set of
DE rates to be issued under the new rule. Under these draft DE rates for the 2015 debt measure year, none of our
programs had failing rates. Nine of our 12 educational programs achieved passing rates, and the other three programs
were in the zone. The three programs in the zone are the Collision Repair, Automotive and Motorcycle programs
at our Universal Technical Institute of Phoenix institution, which includes our MMI Phoenix, Arizona and Orlando,
Florida campuses and our Sacramento, California campus. All of the programs at our Universal Technical Institute
of Arizona and Universal Technical Institute of Texas institutions had passing draft DE rates. The final DE rates
are expected to be issued in early 2017. The next set of rates for the 2016 debt measure year is expected to be
issued later in 2017, although we cannot predict with certainty when the draft and final versions of the rates will
be issued. With respect to future DE rates, we are not able to develop reliable projections of our programs'
performance under the final rule because we do not have access to the SSA earnings data that is used in the
calculations.
If a particular program ceased to be eligible for Title IV Program funding, in most cases it would not be
practical to continue offering that program under our current business model, which could reduce our enrollment
and have a material adverse effect on our cash flows, results of operations and financial condition. In order to
prevent this, we may have to explore mitigation strategies which might include preemptively reducing program
tuition in an attempt to ensure compliance. Because we cannot calculate the exact impact of such action on the
program's DE rates, we may overestimate the required tuition reduction, which would have a negative impact on
our tuition revenues. Conversely, we may underestimate the required tuition reduction and fail to improve the
program's DE rates, which could result in the loss of Title IV eligibility. Additionally, a decrease in or loss of any
non-loan financial aid available to our students, such as financial aid provided by states, as discussed below, could
cause the students to incur more loan debt, which would negatively impact our DE rates. Finally, the disclosures
and warnings required by the final rule could also negatively impact our enrollment and have a material adverse
effect on our cash flows, results of operations and financial condition.
On October 30, 2015, ED published a set of new final regulations which have a general effective date of
July 1, 2016. The regulations include, among other things, revised cash management requirements related to holding
Title IV credit balances. The regulations specify that institutions subject to heightened cash monitoring or
reimbursement payment methods will not be permitted to hold any Title IV credit balances regardless of student
or parent authorization. Instead, these institutions will be required to first credit a student’s ledger account for the
amount of Title IV funds the student or parent is eligible to receive, and pay such credits to the student or parent
within 14 calendar days, prior to initiating a request from ED for funds that include those students and parents.
See “Business - Regulatory Environment - Regulation of Federal Student Financial Aid Programs - Cash
Management” included elsewhere in this Report on Form 10-K. Effective October 10, 2016, we began disbursing
funds under the HCM1 method and we are now required to comply with these regulations.
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On November 1, 2016, ED published final regulations in the Federal Register establishing new rules
regarding, among other things, the ability of borrowers to obtain discharges of their obligations to repay certain
Title IV loans and for ED to initiate a proceeding to collect from the institution the discharged and returned amounts
and the extensive list of circumstances that may require institutions to provide letters of credit or other financial
protection to ED. The new regulations, among other things:
• Establish amended procedures and standards for borrowers, either individually or as a group, to assert
through an ED-administered process a defense to the borrowers’ obligation to repay certain Title IV loans
based on certain acts or omissions of the institution. The regulations also expand the types of defenses
available for loans first disbursed on or after July 1, 2017. If ED approves the borrower’s defense to
repayment through the applicable administrative process established in the proposed regulations, ED may
discharge the borrower’s obligation to repay some or all of the borrower’s student loans and may initiate
a separate proceeding to collect from the institution the discharged and returned amounts.
• Revise the financial responsibility regulations to expand the list of actions or events that would require
an institution to provide ED with a letter of credit or other form of acceptable financial protection and
potentially be subject to other conditions and requirements. The specified list of events is extensive and
includes, among other potential triggers, certain debts or liabilities arising from settlements or final
judgments in judicial or administrative proceedings and certain lawsuits pending for 120 days and initiated
by a federal or state authority against the institution with respect to Direct Loans or educational services;
certain other lawsuits in which the institution’s summary judgment motion was denied or not filed, certain
closures of one or more of the institution’s locations, one or more gainful employment programs with
gainful employment rates that could result in the program becoming ineligible in the next award year,
certain withdrawals of owner’s equity from the institution including by dividend, failure to comply with
the 90/10 Rule for the most recently completed fiscal year, SEC warning that it may suspend trading on
the institution’s stock, failure to file certain reports with the SEC, the exchange on which the institution’s
stock is traded notifying the institution that it is not in compliance with exchange requirements or that its
stock is delisted, cohort default rates of at least 30 percent for its two most recent rates, certain significant
fluctuations in Title IV funding, certain citations for failure to comply with state agency requirements,
failure to comply with yet to be developed ED financial stress tests, high annual dropout rates, the institution
being placed on probation or issued a show-cause or similar action by its accrediting agency, certain
violations of loan agreements, expected or pending claims for borrower relief discharges, and certain
other events that ED might identify as reasonably likely to have a material adverse effect on the financial
condition, business or results of operations of the institutions.
• Require proprietary institutions with student loan repayment rates, as defined in the regulations, below
prescribed thresholds to provide an ED-prepared warning to prospective and enrolled students, as well
as placement of the warning on its website and in all promotional materials and advertisements.
•
Prohibit the use and reliance upon certain contractual provisions regarding dispute resolution processes,
such as pre-dispute arbitration agreements or class action waivers, and require certain notifications,
contract provisions and disclosures by institutions regarding students’ ability to participate in certain class
action lawsuits or initiate certain lawsuits instead of through arbitration.
For a more extended summary of the final rules, see “Business - Regulatory Environment - Regulation of Federal
Student Financial Aid Programs - Defense to Repayment Regulations” and “Business - Regulatory Environment
- Financial Responsibility Regulations” included elsewhere in this Report on Form 10-K. The new regulations
have a general effective date of July 1, 2017.
45
We have devoted significant effort to understanding the effects of these regulations on our business and
to developing compliant solutions that are also congruent with our business, culture and mission to serve our
students and industry relationships. However, these solutions related to implementation and compliance with these
final rules, including but not limited to cash management, compensation, gainful employment and defense to
repayment, may have a material adverse effect on the manner in which we conduct our business, our student
populations and the nature of our programs and could have a material adverse effect on our cash flows, results of
operations and financial condition. Interpretation of the regulations is subject to change if ED provides further
guidance and clarification. The solutions may require further analysis based on the uncertainty noted above and
any additional interpretive guidance that is provided. Existing or future understandings could be different from
ED’s interpretations and thus lead to repayments, restrictions, fines or litigation.
The loss of funds from Veterans' Benefits programs could materially and adversely affect our business.
To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill,
the REAP, and VA Vocational Rehabilitation, an institution must comply with certain requirements established by
the VA. If we fail to comply with these requirements, we could lose our eligibility to participate in veterans' benefits
programs, which could reduce our student population. For additional information regarding this activity, see
“Business - Regulatory Environment - Other Federal and State Programs - Veterans' Benefits” included elsewhere
in this Report on Form 10-K.
Other considerations which could impact the funding we receive from veterans' benefits programs include
the following:
• Access to military installations. Recently, our access to military installations for student recruitment has
become highly restricted due to the changes described in “Business - Regulatory Environment - Other
Federal and State Programs” included elsewhere in this Report on Form 10-K. Restrictions on access
necessary to continue to develop awareness of our programs with this population could reduce our
enrollments.
•
90/10 rule changes. Multiple legislative proposals have been introduced in Congress that would increase
the requirements of the 90/10 Rule, such as reducing the 90% maximum under the rule to 85% and/or
including military and veteran funding in the 90% portion of the calculation. Implementation of these
proposals could have a negative impact on our 90/10 ratio, which could have a negative impact on our
eligibility to participate in Title IV Programs. If any of our institutions loses eligibility to participate in
Title IV Programs, such a loss would adversely affect our students’ access to Title IV Program funds they
need to pay their educational expenses, which could reduce our student population and would have a
material adverse effect on our cash flows, results of operations and financial condition.
• Funding for veterans' benefits programs. Funding for veterans' benefits programs is dependent upon
Congressional appropriations. If appropriations are not maintained at the current level, or if an extended
government shutdown were to occur, the VA might not be able to continue funding veterans' benefits.
•
State Approving Agencies. The VA shares responsibility for VA benefit approval and oversight with
designated SAAs. SAAs play a critical role evaluating institutions and their programs to determine if
they meet VA benefit eligibility requirements. Processes and approval criterion as well as interpretation
of applicable requirements can vary from state to state. Therefore, approval in one state does not
necessarily result in approval in all states. If we are unable to secure approvals in one or more states, if
the process for obtaining an approval takes significant time or if our approval is revoked, we could be
required to alter the delivery methodology or structure of the program or experience delays in or the loss
of a portion of VA funding, or could be required to return a portion of the funding received. Students
receiving VA funding may not be able to receive the full benefit of our Automotive and Diesel Technology
II curricula methodology, which could reduce our enrollments and have a material adverse effect on our
cash flows, results of operations and financial condition.
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Any loss of funds from veterans' benefits programs could reduce our student population and have a material
adverse effect on our cash flows, results of operations and financial condition.
A substantial decrease in student financing options, or a significant increase in financing costs for our students,
could have a negative effect on our student population and consequently, on our cash flows, results of operations
and financial condition.
The student loan market has undergone significant changes in the past few years, including increased
regulations from the HEA reauthorization in 2008, elimination of the FFEL program in 2010 and contraction in
credit markets that has reduced availability of federal and private student loans for certain institutions and/or
students. Many banks and lending institutions have discontinued their private student loan programs. Those that
have stayed in the market have increased financing costs, both rates and fees, to offset the risks associated with
offering unsecured debt. Additionally, the broader economic environment has put pressure on students’ ability to
repay their loans, resulting in higher default rates. These factors may result in lending institutions continuing to
exit the student loan market and in other providers deciding not to enter the market, which could decrease the
availability of alternative loans to postsecondary students, including students with low credit scores who would
not otherwise be eligible for credit-based alternative loans that seek to enroll. Prospective students may find that
increased financing costs make borrowing to fund their education unattractive and motivate them to abandon or
delay enrollment in postsecondary education programs such as ours. Tight credit markets may also move private
lenders to impose on us and on our prospective and continuing students new or increased fees in order to provide
alternative loans. If any of these scenarios were to occur, in whole or in part, our students’ ability to finance their
education could be adversely affected and could result in a decrease in our student population and result in decreased
profitability.
Congress may change the law or reduce funding for or place restrictions on the use of funds received through
Title IV Programs, which could reduce our student population, revenues and/or profit margin.
Congress periodically revises the HEA and other laws, and enacts new laws, governing Title IV Programs
and annually determines the funding level for each Title IV Program, and may make changes in the laws at any
time. Congress most recently reauthorized the HEA in 2008, is actively working on another HEA reauthorization
and is expected to revise and reauthorize the HEA soon. Any action by Congress that significantly reduces funding
for Title IV Programs or the ability of our schools or students to receive funding through these programs or places
restrictions on the use of funds received by an institution through these programs could reduce our student population
and revenues. Such action may occur during HEA reauthorization, or such action could also occur as part of separate
technical amendments to the HEA or during Congress' annual budget and appropriations cycle.
Congressional action may also require us to modify our practices in ways that could increase administrative
costs, reduce the ability of students to finance their education at our schools, and materially decrease student
enrollment and result in decreased profitability.
Continued Congressional examination of the for-profit education sector could result in legislation or further
ED rulemaking restricting Title IV Program participation by for-profit schools in a manner that materially and
adversely affects our business.
Congress continues to be focused on for-profit education institutions, specifically regarding participation
in Title IV Programs and U.S. DOD oversight of tuition assistance for military service members attending for-
profit colleges. For a description of additional information regarding this activity, see “Business - Regulatory
Environment - Regulation of Federal Student Financial Aid Programs - Congressional Action” included elsewhere
in this Report on Form 10-K.
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This Congressional activity could result in the enactment of more stringent legislation by Congress, further
rulemakings affecting participation in Title IV Programs and other governmental actions, increasing regulation of
the for-profit sector. Action by Congress may also increase our administrative costs and require us to modify our
practices in order for our institutions to comply with Title IV Program requirements. In addition, concerns generated
by this Congressional activity may adversely affect enrollment in for-profit educational institutions such as ours.
Any laws that are adopted that limit our or our students’ participation in Title IV Programs or in programs to provide
funds for active duty service members and veterans or the amount of student financial aid for which our students
are eligible, or any decreases in enrollment related to the Congressional activity concerning this sector, could have
a material adverse effect on our cash flows, results of operations and financial condition.
Our business could be harmed if we experience a disruption in our ability to process student loans under the
Federal Direct Loan Program.
Because all Title IV Program student loans other than the Perkins loans are now processed under the DL
program, any processing disruptions by ED may impact our students’ ability to obtain student loans on a timely
basis. If we experience a disruption in our ability to process student loans through the DL program, either because
of administrative challenges on our part or the inability of ED to process the increased volume of loans through
the DL program on a timely basis, our cash flows, results of operations and financial condition could be adversely
and materially affected.
Limited opportunities for private alternative student loans for our students could increase the need for
institutional funding, which could have a material adverse effect on our business, results of operations and
financial condition.
The state of the national economy and generalized lending crisis since 2008 has led to a contracted student
lending environment, resulting in limited lender choices for students who need a private alternative loan to meet
gaps between Title IV Program funding and cost of education. Furthermore, lender underwriting criteria has been
much more stringent, resulting in fewer prospective borrowers being approved for their loans. As lenders seek to
reduce their risk on portfolios of new alternative loans, we have seen many lenders move to shift their target markets
exclusively to four-year baccalaureate degree schools. We currently have a list of six private unaffiliated alternative
loan providers to assist new borrowers in selecting a lender, with two of these lenders providing the vast majority
of our private alternative student loans. If these lenders decided to decline to lend to students attending our schools,
and we were not able to find alternative lenders, the demand for our proprietary loan program could increase,
requiring us to devote greater than planned resources, which could have a material adverse effect on our cash flows,
results of operations and financial condition.
Government and regulatory agencies and third parties may conduct compliance reviews, bring claims or initiate
litigation against us.
Because we operate in a highly regulated industry, we are subject to compliance reviews and claims of
noncompliance by government agencies, regulatory agencies and third parties alleging noncompliance with
applicable standards. These compliance reviews and claims could also result from our notification to an agency
or third party based upon our own internal compliance review. We are also subject to various lawsuits, investigations
and claims, covering a wide range of matters, including, but not limited to alleged violations of federal and state
laws, false claims made to the federal government and routine employment matters. While we are committed to
strict compliance with all applicable laws, regulations and accrediting standards, if the results of government,
regulatory or third party reviews or proceedings are unfavorable to us, or if we are unable to defend successfully
against lawsuits or claims, we may be required to pay monetary damages or be subject to fines, limitations, loss
of regulatory approvals or Title IV Program funding, injunctions or other penalties. We could also incur substantial
legal costs in excess of our insurance coverage. Even if we adequately address issues raised by an agency review
or successfully defend a lawsuit or claim, we may have to divert significant financial and management resources
from our ongoing business operations to address issues raised by those reviews or defend those lawsuits or claims.
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Additionally, given the significant public scrutiny being placed on the sector, numerous state attorneys general
have initiated investigations either of the operation of the for-profit schools in their state or of particular institutions
operating in that state.
In September 2012, we received a Civil Investigative Demand (CID) from the Attorney General of the
Commonwealth of Massachusetts related to a pending investigation in connection with allegations that we caused
false claims to be submitted to the Commonwealth relating to student loans, guarantees and grants provided to
students at our Norwood, Massachusetts campus. The CID required us to produce documents and provide written
testimony regarding a broad range of our business from September 2006 to September 2012. We responded timely
to the request. The Attorney General made a follow-up request for documents, and we complied with this request
in February 2013. In response to a status update request from us, the Attorney General requested and we provided
in April 2015 additional documents and information related to graduate employment at our Norwood, Massachusetts
campus and our policies and practices for determining graduate employment. We have not received any additional
requests since April 2015. At this time, we cannot predict the eventual scope, duration, outcome or associated costs
of this request, and accordingly we have not recorded any liability in the accompanying consolidated financial
statements.
We cannot predict the ultimate outcome of unsettled matters and we may incur significant defense costs
and other expenses in connection with them in excess of our insurance coverage related to these matters. We may
be required to pay substantial damages, settlement costs or fines or penalties. Such costs and expenses could have
a material adverse effect on our business, cash flows, results of operations and financial condition. An adverse
outcome in any of these matters could also materially and adversely affect our licenses, accreditation and eligibility
to participate in Title IV programs.
Our business and stock price could be adversely affected as a result of regulatory investigations of, or actions
commenced against, us or other companies in our industry.
The operations of companies in the education and training services industry, including UTI, are subject
to intense regulatory scrutiny. In some cases, allegations of wrongdoing on the part of such companies have resulted
in formal or informal investigations by the U.S. Department of Justice, the SEC, state governmental agencies, ED
and other federal agencies. These allegations have attracted adverse media coverage and have been the subject of
legislative hearings and regulatory actions at both the federal and state levels, focusing not only on the individual
schools but in some cases on the for-profit postsecondary education sector as a whole. These investigations of or
regulatory actions against specific companies in the education and training services industry could have a negative
impact on our industry as a whole and on our stock price. Furthermore, the outcome of such investigations and
any accompanying adverse publicity could negatively affect student enrollment and heighten the risk of class action
lawsuits against us, which could have a material adverse effect on our cash flows, results of operations and financial
condition.
Changes in the state regulatory environment, including budget constraints and increased regulatory
requirements, may affect our ability to obtain and maintain necessary authorizations or approvals from those
states to conduct or change our operations.
Due to state budget constraints and changes in the regulatory environment in some of the states in which
we operate, it is possible that some states may reduce the number of employees in, or curtail the operations of, the
state education agencies that authorize our schools. A delay or refusal by any state education agency in approving
any changes in our operations that require state approval, such as the opening of a new campus, the introduction
of new programs or the revision of existing programs, a change of control or the hiring or placement of new
admissions representatives, could prevent us from making such changes or delay our ability to make such changes,
or could require substantial additional costs to accommodate such delay. State education agencies that authorize
our schools continue to revise and/or issue new regulations requiring significant additional reporting and monitoring
of student outcomes.
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The regulations may lengthen the time to obtain necessary state approvals and require us to modify our
operations in order to comply with the requirements. This could impose substantial additional costs on our
institutions, which could have a material adverse effect on our cash flows, results of operations and financial
condition.
Moreover, some states have added new regulations that impose new requirements on our schools and
increase the complexity of existing requirements. For example, some states, such as California and Massachusetts,
have added new requirements for institutions to report institutional data to current and prospective students.
California has added requirements to its existing rules for calculating job placement rates for graduates that are
more exacting and difficult to substantiate. Other states have added, or may add in the future, new or more complex
requirements applicable to our institutions. These requirements could create new compliance challenges and
impose substantial additional costs on our institutions which could have a material adverse effect on our cash flows,
results of operations and financial condition.
Budget constraints in states that provide state financial aid to our students could reduce the amount of such
financial aid that is available to our students, which could reduce our student population and negatively affect
our 90/10 Rule calculation and other compliance metrics.
A significant number of states are facing budget constraints that are causing them to reduce state
appropriations in a number of areas. Many of those states provide financial aid to our students. These and other
states may decide to reduce or redirect the amount of state financial aid that they provide to students, but we cannot
predict how significant any of these reductions will be or how long they will last. If the level of state funding
available to our students decreases and our students are not able to secure alternative sources of funding, our student
population could be reduced, which could have a material adverse effect on our profitability. The decrease or loss
of this funding could also negatively impact our DE rates under the gainful employment rule, as well as our cohort
default rates. Additionally, loss of state funding would negatively impact our 90/10 Rule calculation and the cost
of our compliance with the 90/10 Rule, as this funding is counted in the non-Title IV Program funds portion of the
ratio, and such loss would drive up the percentage of revenue attributable to Title IV Programs.
If we acquire an institution that participates in Title IV Programs or open an additional location, one or more
of our regulators could decline to approve the acquired institution and/or additional location, or could impose
material conditions or restrictions, which could prevent or limit the ability of the acquired institution and/or
additional location from participating in Title IV Programs and, in turn, impair our ability to operate the acquired
institution and/or the additional location as planned or to realize the anticipated benefits from the acquisition
of that institution and/or opening of the additional location.
If we acquire an institution that participates in Title IV Program funding and/or open an additional location,
we must obtain approval from ED and applicable state education agencies and accrediting commissions in order
for the institution and/or additional location to be able to operate and participate in Title IV Programs. While we
would attempt to ensure we will be able to receive such approval prior to acquiring an institution and/or opening
an additional location, approval may be withheld. An acquisition can result in the temporary suspension of the
acquired institution’s participation in Title IV Programs and opening an additional location can result in a delay
of the campus’ participation in Title IV Programs unless we submit a timely and materially complete application
for approval of the acquisition or the opening of the new location. Upon an acquisition, ED will only grant a
temporary certification while it reviews the application. If we were unable to timely establish or re-establish the
state authorization, accreditation or ED certification of the acquired institution or obtain approval for the new
location, our ability to operate the acquired institution and/or open the additional location as planned or to realize
the anticipated benefits from the acquisition of that institution and/or the opening of the additional location could
be impaired.
Further, ED and applicable state education agencies and accrediting agencies could impose material
conditions or restrictions on us and the acquired institution and/or the additional location, including but not limited
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to a material letter of credit, limitations or prohibitions on the ability to add new campuses or add or change
educational programs, placement of the institution on the heightened cash monitoring or reimbursement method
of payment and reporting and notification requirements. Additionally, an acquired institution may have known or
unknown instances of noncompliance with federal, state or accrediting agency requirements including, but not
limited to, noncompliance with gainful employment requirements or with requirements included in the new defense
to repayment regulations that could result in liabilities, sanctions, or material conditions or restrictions that we
may inherit by acquiring the institution. Although we attempt to conduct thorough due diligence of institutions
that we intend to acquire, our due diligence efforts may be unsuccessful and fail to identify noncompliance or other
facts that could result in liabilities, sanctions, or material conditions or restrictions. The imposition of liabilities,
sanctions, or material conditions or restrictions by one or more regulators could impair our ability to operate the
acquired institution and/or open the additional location as planned or to realize the anticipated benefits from the
acquisition of that institution and/or the opening of the additional location.
If regulators do not approve or delay their approval of transactions involving a change of control of our company
or any of our schools, our ability to participate in Title IV Programs may be impaired.
If we or any of our schools experience a change of control under the standards of applicable state education
agencies, our accrediting commission or ED, we or the affected schools must seek the approval of the relevant
regulatory agencies. These agencies do not have uniform criteria for what constitutes a change of control.
Transactions or events that constitute a change of control include significant acquisitions or dispositions of our
common stock or significant changes in the composition of our board of directors. Some of these transactions or
events may be beyond our control. Our failure to obtain, or a delay in receiving, approval of any change of control
from ED, our accrediting commission or any state in which our schools are located would impair our ability to
participate in Title IV Programs, which would have a material adverse effect on our cash flows, results of operations
and financial condition. Our failure to obtain, or a delay in obtaining, approval of any change of control from any
state in which we do not have a school but in which we recruit students could require us to suspend our recruitment
of students in that state until we receive the required approval. The potential adverse effects of a change of control
with respect to participation in Title IV Programs could influence future decisions by us and our stockholders
regarding the sale, purchase, transfer, issuance or redemption of our stock.
Risks Related to Our Business
If we fail to effectively fill our existing capacity, we may experience a deterioration of our profitability and
operating margins.
We have underutilized seating capacity at several of our campuses. Our ongoing efforts to fill existing
seating capacity may strain our management, operations, employees or other resources. We may not be able to
maintain our current seating capacity utilization rates, effectively manage our operation or achieve planned capacity
utilization on a timely or profitable basis. If we are unable to fill our underutilized seating capacity, we may
experience operating inefficiencies that likely will increase our costs more than we had planned resulting in a
deterioration of our profitability and operating margins.
Our proprietary loan program could have a negative effect on our results of operations.
Our proprietary loan program enables students who have utilized all available government-sponsored or
other financial aid and have not been successful in obtaining private loans from other financial institutions, for
independent students, or PLUS loans, for dependent students, to borrow a portion of their tuition if they meet
certain criteria.
Under the proprietary loan program, the bank originates loans for our students who meet our specific
credit criteria with the related proceeds to be used exclusively to fund a portion of their tuition. We then purchase
all such loans from the bank at least monthly and assume all the related credit and collection risk. See Note 2 of
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the notes to our consolidated financial statements within Part IV of this Report on Form 10-K for further discussion
of activity under our proprietary loan program.
Factors that may impact our ability to collect these loans include the following: current economic
conditions; compliance with laws applicable to the origination, servicing and collection of loans; the quality of
our loan servicers’ performance; a decline in graduate employment opportunities and the priority that the borrowers
under this loan program attach to repaying these loans as compared to other obligations, particularly students who
did not complete or were dissatisfied with their programs of study. Because we record revenues upon the receipt
of cash payments, if we are unable to collect on these loans, our revenues and profitability may continue to be
adversely impacted.
Federal, state and local laws and general legal and equitable principles relating to the protection of
consumers can apply to the origination, servicing and collection of the loans under our proprietary loan program.
Any violation of various federal, state or local laws, including, in some instances, violations of these laws by parties
not under our control, may result in losses on the loans or may limit our ability to collect all or part of the principal
or interest on the loans. This may be the case even if we are not directly responsible for the violations by such
parties.
Our proprietary loan program may also be subject to oversight by the CFPB, which could result in
additional reporting requirements or increased scrutiny. Other proprietary postsecondary institutions have been
subject to recent information requests from the CFPB with regard to their private student loan programs. The
possibility of litigation, and the associated cost, are risks associated with this student loan program. At least two
proprietary education institutions have been subject to recent lawsuits under the Consumer Financial Protection
Act of 2010; the institutions are accused of having unfair private student loan programs and of allegedly engaging
in certain abusive practices, including interfering with students' ability to understand their debt obligations and
failing to provide certain material information.
Changes in laws or public policy could negatively impact the viability of this student loan program and
cause us to delay or suspend the program. Additionally, depending on the terms of the loans, state consumer credit
regulators may assert that our activities in connection with the student loan program require us to obtain one or
more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained
in a timely manner, if at all. All of these factors could result in the proprietary loan program having a material
adverse effect on our cash flows, results of operations and financial condition.
We rely on third parties to originate, process and service loans under our proprietary loan program. If these
companies fail or discontinue providing such services, our business could be harmed.
A state chartered bank with a small market capitalization originates loans under our proprietary loan
program. If the bank no longer provides service under the contract, we do not currently have an alternative bank
to fulfill the demand. There are a limited number of banks that are willing to participate in a program such as our
proprietary loan program. The time it could take us to replace the bank could result in an interruption in the loan
origination process, which could result in a decrease in our student populations. Furthermore, a single company
processes loan applications and services the loans under our proprietary loan program. There is a 90-day termination
clause in the contract under which they provide these services. If this company were to terminate the contract, we
could experience an interruption in loan application processing or loan servicing, which could result in a decrease
in our student populations.
Failure on our part to maintain and expand existing industry relationships and develop new industry
relationships with our industry customers could impair our ability to attract and retain students.
We have extensive industry relationships that we believe afford us significant competitive strength and
support our market leadership. These relationships enable us to support undergraduate enrollment by attracting
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students through brand name recognition and the associated prospect of high-quality employment opportunities.
Additionally, these relationships allow us to diversify funding sources, expand the scope and increase the number
of programs we offer and reduce our costs and capital expenditures due to the fact that, pursuant to the terms of
the underlying contracts with OEMs, we provide a variety of specialized training programs and typically do so
using tools, equipment and vehicles provided by the OEMs. These relationships also provide additional incremental
revenue opportunities from training the employees of our industry customers. Our success depends in part on our
ability to maintain and expand our existing industry relationships and to enter into new industry relationships.
Certain of our existing industry relationships, including those with American Honda Motor Co. Inc.; Mercury
Marine, a division of Brunswick Corp.; Volvo Penta of the Americas, Inc. and Yamaha Motor Corp., USA, are not
memorialized in writing and are based on verbal understandings. As a result, the rights of the parties under these
arrangements are less clearly defined than they would be had they been in writing. Additionally, certain of our
written agreements may be terminated without cause by the OEM. Finally, certain of our existing industry
relationship agreements expire within the next six months. We are currently negotiating to renew these agreements
and intend to renew them to the extent we can do so on satisfactory terms. The reduction or elimination of, or
failure to renew any of our existing industry relationships, or our failure to enter into new industry relationships,
could impair our ability to attract and retain students, require additional capital expenditures or increase expenses
and have a material adverse effect on our cash flows, results of operations and financial condition.
Competition could decrease our market share and create tuition pricing concerns.
The postsecondary education market is highly competitive. The elimination of ability-to-benefit options
for establishing general student eligibility for Title IV Program funds beginning July 1, 2012 has increased
competition for higher quality students. Some traditional public and private colleges and universities and community
colleges, as well as other private career-oriented schools, offer programs that may be perceived by students to be
similar to ours. Most public institutions are able to charge lower tuition than our schools, due in part to government
subsidies and other financial sources not available to for-profit schools. Additionally, recent executive branch
proposals have included two years of free tuition at community colleges for certain students, who must attend
school at least half time, maintain a grade point average of 2.5 or higher and make steady progress toward a degree
or transferring to a four-year institution.
We may limit tuition increases or increase spending in response to competition in order to retain or attract
students or pursue new market opportunities; however, if we cannot effectively respond to competitor changes, it
could reduce our enrollments and our student populations. We cannot be sure that we will be able to compete
successfully against current or future competitors or that competitive pressures faced by us will not adversely affect
our market share, revenues and operating margin.
Our success depends in part on 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.
Prospective employers of our graduates demand that their entry-level employees possess appropriate
technological skills. These skills are becoming more sophisticated in line with technological advancements in the
automotive, diesel, collision repair, motorcycle and marine industries. Accordingly, educational programs at our
schools must keep pace with those technological advancements. Additionally, the method used to deliver curriculum
has been evolving to include on-line delivery. The expansion of our existing programs and the development of
new programs, including our Automotive and Diesel Technology II curricula, and changes in the method in which
we deliver them, may not be accepted by our students, prospective employers or the technical education market.
Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as
quickly as the industries we serve require or as quickly as our competitors. If we are unable to adequately respond
to changes in market requirements due to unusually rapid technological changes or other factors, our ability to
attract and retain students could be impaired and our graduate employment rates could suffer.
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Our Automotive and Diesel Technology II curricula are a blend of daily instructor-led theory and hands-
on lab training complimented by interactive web-based learning, which is reflective of current industry training
methods and standards. The blended learning model combines several methodologies for communicating training
information and incorporates on-site classes, real-time web-based learning sessions and independent learning and
is the standard used by our OEMs to provide continuous technical education. If we are unable to address and
respond to requirements such as training instructors to teach the curricula, develop an IT infrastructure that would
effectively support this program, obtain the appropriate equipment to teach this program to our students, or obtain
the appropriate regulatory approvals to teach and fund this program, we may not be able to successfully roll out
the curricula to new or existing campuses in a timely and cost-effective manner. If we are not able to effectively
and efficiently integrate the curricula or experience delays in development, this could have a material adverse
effect on our cash flows, results of operations and financial condition.
Macroeconomic conditions, particularly unemployment, could adversely affect our business.
The U.S. economy and the economies of other key industrialized countries are experiencing difficult and
uncertain economic characteristics. While the economy has shown signs of recovery, the impact has not been
equal, and certain sectors and socioeconomic groups continue to be negatively impacted. We believe that our
enrollment is affected by changes in economic conditions, although the nature and magnitude of this effect are
uncertain and may change over time. While these conditions may have contributed to a portion of the past growth
in our average full-time undergraduate student population as individuals sought to advance their education and
improve their employment opportunities, during periods when the unemployment rate declines or remains stable
as it has in recent years, prospective students have more employment options and recruiting new students has
traditionally been more challenging. Affordability concerns associated with increased living expenses and the
availability of full- and part-time jobs for students attending classes have made it more challenging for us to attract
and retain students. The state of the general macroeconomic environment has had a negative impact on price
sensitivity and on the ability and willingness of students and their families to incur debt. Furthermore, these
circumstances may continue to reduce the willingness of employers to sponsor educational opportunities for their
employees, and affect the ability of our students to find employment in the auto, diesel, collision repair, motorcycle
or marine industries, any of which could materially and adversely affect our business, cash flows, results of
operations and financial condition.
Adverse market conditions for consumer and federally guaranteed student loans could adversely impact
the ability of borrowers with little or poor credit history, such as many of our students, to borrow the necessary
funds at an acceptable interest rate. These events could adversely affect the ability or willingness of our former
students to repay student loans, which could increase our student loan cohort default rate and require increased
time, attention and resources to manage these defaults.
We rely heavily on the reliability and performance of an internally developed student management and reporting
system, and any difficulties in maintaining this system may result in service interruptions, decreased customer
service or increased expenditures.
The software that underlies our student management and reporting has been developed primarily by our
own employees. The reliability and continuous availability of this internal system and related integrations are
critical to our business. Any interruptions that hinder our ability to timely deliver our services, or that materially
impact the efficiency or cost with which we provide these services, or our ability to attract and retain computer
programmers with knowledge of the appropriate computer programming language, would adversely affect our
reputation and profitability and our ability to conduct business and prepare financial reports. Additionally, many
of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial
products, either of which could entail considerable effort and expense.
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System disruptions and security threats to our computer networks, including breach of the personal information
we collect, could have a material adverse effect on our business and our reputation.
Our computer systems as well as those of our service providers are vulnerable to interruption, malfunction
or damage due to events beyond our control, including malicious human acts committed by foreign or domestic
persons, natural disasters, and network and communications failures. We have established a written data breach
incident response policy which we test informally and formally at least annually. Additionally, we periodically
perform vulnerability self-assessments and engage service providers to perform independent vulnerability
assessments and penetration tests. However, despite network security measures, our servers and the servers at our
service providers are potentially vulnerable to physical or electronic unauthorized access, computer hackers,
computer viruses, malicious code, organized cyber attacks and other security problems and system disruptions.
Increasing socioeconomic and political instability in some countries has heightened these risks. Despite the
precautions we and our service providers have taken, our systems may still be vulnerable to these threats. A user
who circumvents security measures could misappropriate proprietary information or cause interruptions or
malfunctions in operations.
Additionally, the personal information that we collect subjects us to additional risks and costs that could
harm our business and our reputation. We collect, retain and use personal information regarding our students and
their families and our employees, including personally identifiable information, tax return information, financial
data, bank account information and other data. Although we employ various network and business security measures
to limit access to and use of such personal information, we cannot guarantee that a third party will not circumvent
such security measures, resulting in the breach, loss or theft of the personal information of our students and their
families and our employees. Possession and use of personal information in our operations also subjects us to
legislative and regulatory burdens that could restrict our use of personal information and require notification of
data breaches. A violation of any laws or regulations relating to the collection, retention or use of personal
information could also result in the imposition of fines or lawsuits against us.
Sustained or repeated system failures or security breaches that interrupt our ability to process information
in a timely manner or that result in a breach of proprietary or personal information could have a material adverse
effect on our operations and our reputation. Although we maintain insurance in respect of these types of events,
available insurance proceeds may not be adequate to compensate us for damages sustained due to these events.
We may not be able to retain our key personnel or hire and retain the personnel we need to sustain and grow
our business.
Our success to date has depended, and will continue to depend, largely on the skills, efforts and motivation
of our executive officers who generally have significant experience with our company and within the technical
education industry. Our success also depends in large part upon our ability to attract and retain highly qualified
faculty, campus presidents, administrators and corporate management. Due to the nature of our business, we face
significant competition in the attraction and retention of personnel who possess the skill sets that we seek. The
for-profit education sector is under significant regulatory and government scrutiny, which may make it more difficult
to attract and retain talent. Additionally, key personnel may leave us and subsequently compete against us. Because
we do not currently carry “key man” life insurance, the loss of the services of any of our key personnel, or our
failure to attract and retain other qualified and experienced personnel on acceptable terms, could impair our ability
to successfully manage our business.
If we are unable to hire, retain and continue to develop and train our admissions representatives, the effectiveness
of our student recruiting efforts would be adversely affected.
In order to support revenue growth and student enrollment, we need to hire and train new admissions
representatives, as well as retain and continue to develop our existing admissions representatives, who are our
employees dedicated to student recruitment. Our ability to develop a strong admissions representative team may
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be affected by a number of factors, including the following: our ability to integrate and motivate our admissions
representatives; our ability to effectively train our admissions representatives; the length of time it takes new
admissions representatives to become productive; the competition we face from other companies in hiring,
compensating and retaining admissions representatives and our ability to effectively manage a multi-location
educational organization. We previously made modifications to our employee compensation structure in order to
comply with the incentive compensation rule which affected the compensation structure for our admissions
representatives, including the elimination of their variable compensation. As a result of these changes and the
macroeconomic conditions impacting our business, we experienced a decrease in our enrollment rates. ED published
guidance in November 2015 that eliminated certain restrictions on incentive compensation for admissions
representatives. Specifically, ED reconsidered its previous interpretation and stated that its regulations do not
prohibit compensation for admissions representatives that is based upon students’ graduation from, or completion
of, educational programs. Compensation based on enrolling students, however, continues to be prohibited. For a
description of additional information regarding these regulatory changes, see “Business - Regulatory Environment
- Regulation of Federal Student Financial Aid Programs - Incentive Compensation” included elsewhere in this
Report on Form 10-K. We have begun making adjustments to the compensation practices for our admissions
representatives which we believe will be compliant with ED's November 2015 guidance. The transition period for
the new compensation structure will continue through calendar year 2018. We will continue to evaluate other
compensation options under these regulations and guidance. Our existing compensation structure and any future
changes to admissions representative compensation may result in a continued decrease in our enrollment rates. If
we are unable to hire, develop or retain quality admissions representatives, the effectiveness of our student recruiting
efforts would be adversely affected.
Our financial performance depends in part on our ability to continue to develop awareness and acceptance of
our programs among high school graduates, military personnel and adults seeking advanced training.
The awareness of our programs among high school graduates, military personnel and working adults
seeking advanced training is critical to the continued acceptance and growth of our programs. Our inability to
continue to develop awareness of our programs could reduce our enrollments, which could have a material adverse
effect on our cash flows, results of operations and financial condition. The following are some of the factors that
could prevent us from successfully marketing our programs:
•
•
•
•
•
•
•
student dissatisfaction with our programs and services;
diminished access to high school student populations, including school district limitations on access
to students by for-profit institutions;
reduced access to military bases and installations;
our failure to maintain or expand our brand or other factors related to our marketing or advertising
practices;
our inability to maintain relationships with automotive, diesel, collision repair, motorcycle and marine
manufacturers and suppliers;
availability of funding sources acceptable to our students; and
recruitment of veterans or other potential students without formal education by our industry partners
and other manufacturers.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our
common stock.
In reviewing our results of operations, you should not focus on quarter-to-quarter comparisons. Our
results in any quarter may not indicate the results we may achieve in any subsequent quarter or for the full year.
56
Our revenues normally fluctuate as a result of seasonal variations in our business, principally due to changes in
total student population. Student population varies as a result of new student enrollments, graduations and student
attrition. Historically, our schools have had lower student populations in our third fiscal quarter than in the remainder
of our fiscal year because fewer students are enrolled during the summer months. Our expenses, however, do not
generally vary at the same rate as changes in our student population and revenues and, as a result, such expenses
do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuations in results of operations to
continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of acquisitions,
new school openings, new program introductions and increased enrollments of adult students. Additionally, our
revenues for our first fiscal quarter are adversely affected by the fact that we do not recognize revenue during the
calendar year-end holiday break, which falls primarily in that quarter. These fluctuations may result in volatility
or have an adverse effect on the market price of our common stock.
If we fail to maintain effective internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in
our financial reporting, which would harm our business and the trading price of our stock.
Internal control over financial reporting is a process designed by or under the supervision of our principal
executive and principal financial officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Our internal control structure is also designed to provide
reasonable assurance that fraud would be detected or prevented before our financial statements could be materially
affected.
Because of inherent limitations, our internal controls over financial reporting may not prevent or detect
all misstatements. Additionally, projections of any evaluation of effectiveness to future periods are subject to the
risks that our controls may become inadequate as a result of changes in conditions or the degree of compliance
with our policies and procedures may deteriorate.
If our internal control over financial reporting was not effective, our historical financial statements could
require restatement which could negatively impact our reputation and lead to a decline in our stock price.
Failure on our part to effectively identify, establish and operate additional schools or campuses could reduce
our ability to implement our growth strategy.
As part of our business strategy we anticipate opening and operating new schools or campuses.
Establishing new schools or campuses poses unique challenges and requires us to make investments in management
and capital expenditures, incur marketing expenses and devote other resources that are different, and in some cases
greater, than those required with respect to the operation of acquired schools. Accordingly, when we open new
schools, initial investments could reduce our profitability. To open a new school or campus, we would be required
to obtain appropriate state and accrediting commission approvals, which may be conditioned or delayed in a manner
that could significantly affect our growth plans. Additionally, to be eligible for Title IV Program funding, a new
school or campus would have to be certified by ED. We cannot be sure that we will be able to identify suitable
expansion opportunities to maintain or accelerate our current growth rate or that we will be able to successfully
integrate or profitably operate any new schools or campuses. Our failure to effectively identify, establish and
manage the operations of newly established schools or campuses could slow our growth and make any newly
established schools or campuses more costly to operate than we have historically experienced.
We may be unable to successfully complete or integrate future acquisitions.
We may consider selective acquisitions in the future. We may not be able to complete any acquisitions
on favorable terms or, even if we do, we may not be able to successfully integrate the acquired businesses into our
business. Integration challenges include, among others, regulatory approvals, significant capital expenditures,
57
assumption of known and unknown liabilities, our ability to control costs and our ability to integrate new personnel.
The successful integration of future acquisitions may also require substantial attention from our senior management
and the senior management of the acquired schools, which could decrease the time that they devote to the day-to-
day management of our business. If we do not successfully address risks and challenges associated with acquisitions,
including integration, future acquisitions could harm, rather than enhance, our operating performance. Additionally,
if we consummate an acquisition, our capitalization and results of operations may change significantly. A future
acquisition could result in the incurrence of debt and contingent liabilities, an increase in interest expense,
amortization expenses, goodwill and other intangible assets, charges relating to integration costs or an increase in
the number of shares outstanding. In addition, our acquisition of a school is a change of ownership of that school,
which may result in the temporary suspension of that school’s participation in federal student financial aid programs
until it obtains ED’s approval. These results could have a negative effect on our cash flows, results of operations
and financial condition or result in dilution to current stockholders.
We have recorded a significant amount of goodwill, which may become impaired and subject to a write-down.
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 might result
from the deterioration in the operating performance of the acquired business, adverse market conditions, adverse
changes in the applicable laws or regulations and a variety of other circumstances. Any resulting impairment charge
is recognized as an expense in the period in which impairment is identified.
Our goodwill resulted primarily from the acquisition of our motorcycle and marine education business
in 1998. We recorded an impairment charge of $12.4 million related to the goodwill allocated to our MMI Phoenix,
Arizona campus during the year ended September 30, 2015. The remaining $8.2 million of goodwill from this
acquisition is allocated to our MMI Orlando, Florida campus that provides the related educational programs.
Additionally, we recorded $0.8 million of goodwill related to the acquisition of BrokenMyth Studios, LLC in
February 2016. Our total recorded goodwill was $9.0 million as of September 30, 2016. We perform our annual
goodwill impairment assessment during the fourth quarter of each fiscal year. Goodwill is reviewed at least annually
for impairment, which might result from the deterioration in the operating performance of the acquired business,
adverse market conditions, adverse changes in the applicable laws or regulations and a variety of other
circumstances. Actual experience may differ from the amounts included in our assessment, which could result in
impairment of our goodwill in the future.
Our principal stockholder owns a significant percentage of our capital stock, is able to influence certain corporate
matters and could in the future gain substantial control over our company.
As of September 30, 2016, Coliseum Capital Management, LLC and its affiliates (Coliseum)
beneficially owned, in the aggregate, approximately 14.6% of our outstanding common stock and 100% of our
outstanding Series A Preferred Stock, which votes on an as-converted basis subject to a voting cap, as described
below. The voting power of Coliseum, including the common stock and the as-converted preferred stock with the
voting cap, is approximately 18.9% as of September 30, 2016.
Pursuant to the Certificate of Designations of Series A Preferred Stock (Certificate of Designations),
the Series A Preferred Stock may be converted into common stock, subject to certain conditions. Until stockholder
approval, as required under the listing standards of the NYSE, and approval of the applicable educational regulatory
agencies (Required Approvals), including ED, is obtained, the Series A Preferred Stock beneficially owned by the
holders of Series A Preferred Stock and their respective affiliates may only be converted into common stock to the
extent that, after giving effect to such conversion, the amount of common stock the holder thereof together with
its affiliates would beneficially own pursuant to such conversion, in the aggregate, is less than or equal to 4.99%
of the common stock outstanding on the date of issuance of the Series A Preferred Stock (Conversion Cap). The
Conversion Cap will not apply to the Series A Preferred Stock once we obtain the Required Approvals.
58
Holders of shares of Series A Preferred Stock are entitled to vote with the holders of shares of common
stock and any other class or series similarly entitled to vote with the holders of common stock and not as a separate
class, at any annual or special meeting of stockholders of our company, and may act by written consent in the same
manner as the holders of common stock, on an as-converted basis. Prior to the receipt of the Required Approvals,
the Series A Preferred Stock beneficially owned by each holder of Series A Preferred Stock, or any of its respective
affiliates may only be voted to an extent not to exceed 4.99% of the aggregate voting power of all of our voting
stock outstanding at the close of business on the issue date (Voting Cap). Additionally, a majority of the voting
power of the Series A Preferred Stock must approve certain significant actions of our company, such as (i)
amendments to our Certificate of Incorporation or bylaws in a manner adverse to the rights, preferences, privileges
or voting powers of the Series A Preferred Stock, (ii) the creation or issuance of a series of stock, or other security
convertible into a series of stock, with equal or greater rights than the Series A Preferred Stock, (iii) the issuance
of equity securities, or securities convertible into equity, at a price that is 25% below fair market value at the time
of issuance, (iii) subject to certain exceptions, the incurrence of indebtedness, (iv) subject to certain exceptions,
the sale or licensing of any material asset of our company, (v) subject to certain exceptions, the consummation of
acquisitions (of stock or assets), (vi) subject to certain exceptions, the payment of certain dividends or distributions
with respect to a series of stock junior to the Series A Preferred Stock, (vii) the voluntary liquidation, dissolution
or winding-up of our company if the Series A Preferred Stock would not have the option to receive the liquidation
preference then in effect upon such liquidation, dissolution or winding-up of our company or, (viii) subject to
certain exceptions, any merger, consolidation, recapitalization, reclassification or other transaction in which
substantially all of the common stock of our company is exchanged or converted into cash, securities or property
and in which the holders of the Series A Preferred Stock shall not have the option to receive the full liquidation
preference as a result of that transaction.
In the event that the Required Approvals are obtained in the future, Coliseum could gain substantial
control over our company. For example, if the Required Approvals had been obtained as of September 30, 2016,
Coliseum’s aggregate voting power would have increased from 18.9% to 53.9%. As a consequence, Coliseum
would be able to control matters requiring stockholder approval, including the election of directors. The interests
of Coliseum may not always coincide with the interests of our other stockholders. For instance, this concentration
of ownership may have the effect of delaying or preventing a change of control of our company otherwise favored
by our other stockholders and could depress our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
59
ITEM 2. PROPERTIES
Campuses and Other Properties
The following sets forth certain information relating to our campuses and corporate headquarters:
Location
Campuses:
Arizona (Avondale)
Arizona (Phoenix)
California (Long Beach)
California (Rancho
Cucamonga)
California (Sacramento)
Florida (Orlando)
Illinois (Lisle)
Brand
UTI
MMI
UTI
UTI
UTI
UTI/MMI
UTI
Massachusetts (Norwood)
UTI
North Carolina
(Mooresville)
NASCAR
Tech
Pennsylvania (Exton)
Texas (Dallas/Ft. Worth)
Texas (Houston)
Corporate
Headquarters: Arizona (Scottsdale)
UTI
UTI
UTI
Approximate
Square
Footage
268,700
129,400
142,000
187,300
239,100
263,100
180,000
245,000
146,000
188,800
95,000
221,300
Leased
or
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned/
leased*
Lease Expiration
Date
June 2024
December 2022
August 2030
September 2019
July 2022
August 2022
November 2031
October 2022
September 2022
December 2020
N/A
December 2018*
Headquarters
77,100
Leased
December 2019
*We own 172,200 square feet and lease the remaining 49,100 square feet.
Many of the leases are renewable for additional terms at our option.
ITEM 3. 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.
In September 2012, we received a Civil Investigative Demand (CID) from the Attorney General of the
Commonwealth of Massachusetts related to a pending investigation in connection with allegations that we caused
false claims to be submitted to the Commonwealth relating to student loans, guarantees and grants provided to
students at our Norwood, Massachusetts campus. The CID required us to produce documents and provide written
60
testimony regarding a broad range of our business from September 2006 to September 2012. We responded timely
to the request. The Attorney General made a follow-up request for documents, and we complied with this request
in February 2013. In response to a status update request from us, the Attorney General requested and we provided
in April 2015 additional documents and information related to graduate employment at our Norwood, Massachusetts
campus and our policies and practices for determining graduate employment. We have not received any additional
requests since April 2015. At this time, we cannot predict the eventual scope, duration, outcome or associated costs
of this request, and accordingly we have not recorded any liability in the accompanying consolidated financial
statements.
ITEM 4. MINE SAFETY DISCLOSURES
None.
EXECUTIVE OFFICERS OF UNIVERSAL TECHNICAL INSTITUTE, INC.
The executive officers of UTI are set forth in this table. All executive officers serve at the direction of
the Board of Directors. Ms. McWaters also serves as a director of UTI.
Name
Age Position
Kimberly J. McWaters
52 Chairman of the Board, Chief Executive Officer and President
Bryce H. Peterson
Chad A. Freed
38 Chief Financial Officer
43 General Counsel, Executive Vice President of Corporate
Development
Sherrell E. Smith
Jeffry B. May
53 Executive Vice President of Admissions and Operations
46 Senior Vice President, Marketing
Rhonda R. Turner
43 Senior Vice President, People Services
Kimberly J. McWaters has served as our Chief Executive Officer since October 2003, as the Chairman
of our Board of Directors since December 2013, as our President since September 2016 and as a director on our
Board since February 2005. Ms. McWaters served as UTI’s President from 2000 to March 2011 and previously
served on our Board from 2002 to 2003. From 1984 to 2000, Ms. McWaters held several positions with UTI,
including Vice President of Marketing and Vice President of Sales and Marketing. Ms. McWaters also serves as a
director of Penske Automotive Group, Inc. and Mobile Mini, Inc. Ms. McWaters received a BS in Business
Administration from the University of Phoenix.
Bryce H. Peterson has served as our Chief Financial Officer since September 2016. Mr. Peterson served
as Senior Vice President, Information Technology from June 2012 to September 2016, as Vice President of
Information Technology from March 2011 to June 2012, as Vice President of Internal Audit Services from March
2010 to March 2011 and as Information Technology Audit Manager from October 2008 to February 2010. Prior
to joining UTI, Mr. Peterson served in a variety of positions at KPMG, LLP; Brigham Young University; and
Fenton Enterprises. Mr. Peterson received his MS in Information Systems Management and holds a BS in Business
Management from Brigham Young University. Mr. Peterson is a certified public accountant licensed in the state
of Arizona.
Chad A. Freed has served as our General Counsel, Executive Vice President of Corporate Development
since June 2015 and is also our Corporate Secretary. Mr. Freed served as Senior Vice President of Business
Development from March 2009 to June 2015, as Senior Vice President, General Counsel from February 2005 to
March 2009 and as inside legal counsel since March 2004. Prior to joining UTI, Mr. Freed was a Senior Associate
in the Corporate Finance and Securities department at Bryan Cave LLP. Mr. Freed received his Juris Doctor from
Tulane University and holds a BS in International Business and French from Pennsylvania State University.
61
Sherrell E. Smith has served as our Executive Vice President of Admissions and Operations since June
2015. Mr. Smith served as Senior Vice President, Operations from August 2012 to June 2015. During his previous
tenure with UTI from 1986 to 2009, Mr. Smith held several positions with UTI including Campus President,
Regional Vice President of Operations, Senior Vice President of Operations and Education and Executive Vice
President of Operations. Prior to his return to UTI, Mr. Smith advised a private equity firm on acquisition
opportunities in the education field and served as the Chief Executive Officer of the American Institute of
Technology. Mr. Smith received a BS in Management from Arizona State University.
Jeffry B. May has served as our Senior Vice President, Marketing since September 2014. Mr. May served
as Vice President, Integrated Marketing & Analytics from September 2013 to September 2014, as Vice President,
Marketing Operations & Analytics from October 2012 to September 2013, and as Vice President, Student
Experience & Operational Excellence from March 2009 to October 2012. Prior to joining UTI, Mr. May served
as First Vice President Capital Markets from 2005 to 2009 and as Vice President and Senior Finance Manager from
2002 to 2004 at Washington Mutual. Mr. May holds a BS in Economics from the University of Arizona.
Rhonda R. Turner has served as our Senior Vice President of People Services since June 2010. In addition
to leading our People Services (Human Resources) function, from October 2014 through March 2016, Ms. Turner
provided leadership for our Advanced Training Recruitment and Industry Employment functions. Prior to her
current role, Ms. Turner served as Vice President of People Services from August 2009 to May 2010, as Vice
President of People Services Partnerships & Training from January 2008 to July 2009 and as Director, People
Services Partnerships, from January 2006 to December 2007. Prior to joining UTI, Ms. Turner served in human
resources leadership positions at ConocoPhillips, Circle K and Main Street Restaurant Group, Inc., a TGI Friday’s
franchisee. Ms. Turner received her BS in Human Resources Management from Arizona State University.
62
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “UTI”.
The following table sets forth the range of high and low sales prices per share for our common stock, as
reported by the NYSE, for the periods indicated.
Fiscal Year Ended September 30, 2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended September 30, 2015:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Price Range of
Common Stock
High
Low
5.88
5.12
4.53
2.91
$
$
$
$
Price Range of
Common Stock
High
Low
11.97
10.30
10.45
8.75
$
$
$
$
3.28
2.81
2.06
1.51
9.19
8.15
7.94
3.50
$
$
$
$
$
$
$
$
The closing price of our common stock as reported by the NYSE on November 21, 2016 was $2.39 per
share. As of November 21, 2016, there were 30 holders of record of our common stock.
Dividends
On October 5, 2015; December 18, 2015 and March 31, 2016, we paid cash dividends of $0.02 per share
to common stockholders of record as of September 28, 2015, December 4, 2015 and March 21, 2016, respectively,
totaling approximately $1.5 million. On June 9, 2016, our Board of Directors voted to eliminate the quarterly cash
dividend on our common stock. On December 19, 2014; March 31, 2015 and June 30, 2015, we paid cash dividends
of $0.10 per share to common stockholders of record as of December 8, 2014; March 20, 2015 and June 19, 2015,
respectively. The aggregate payment was approximately $7.3 million. Any future common stock dividends require
the approval of a majority of the voting power of the Series A Preferred Stock.
We continuously evaluate our cash position in light of growth opportunities, operating results and general
63
market conditions.
Repurchase of Securities
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 September 30, 2016, 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 year ended September 30, 2016, 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 our Series A Preferred Stock.
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 September 30, 2016. Shares from share repurchases in lieu of taxes
are returned to the pool of shares issuable under our 2003 Incentive Compensation Plan.
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share
— $
— $
$
170,717
170,717 $
—
—
2.24
2.24
(c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
(d) Approximate
Dollar Value of
Shares that May Yet
Be Purchased Under
the Plans Or
Programs
(In thousands)
— $
— $
— $
— $
—
—
—
—
Period
Tax Withholdings
July 1-31, 2016
August 1-31, 2016
September 1-30, 2016
Total
Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material”
or “filed” with the Securities and Exchange Commission, nor should such information be incorporated by reference
into any future filings under the Securities Act or the Securities Exchange Act except to the extent that we specifically
incorporate it by reference in such filing.
This graph compares total cumulative stockholder return on our common stock during the period from
September 30, 2011 through September 30, 2016 with the cumulative return on the NYSE Stock Market Index
(U.S. Companies) and a Peer Issuer Group Index. The peer issuer group consists of the companies identified below,
which were selected on the basis of the similar nature of their business. The graph assumes that $100 was invested
on September 30, 2011, and any dividends were reinvested on the date on which they were paid.
64
220.0
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
60.0
40.0
20.0
200.7
100.0
54.8
49.3
15.0
0.0
9/30/2011
9/30/2012
9/30/2013
9/30/2014
9/30/2015
9/30/2016
Symbol
CRSP Total Returns Index for:
09/2011
09/2012
09/2013
09/2014
09/2015
09/2016
Universal Technical Institute, Inc.
NYSE Stock Market (US Companies)
New Peer Group
Former Peer Group
100.0
100.0
100.0
100.0
103.2
129.1
71.1
70.2
94.7
156.9
75.4
70.2
75.4
182.4
87.5
79.5
29.4
175.5
58.1
52.8
15.0
200.7
54.8
49.3
Companies in the New Self-Determined Peer Group
Apollo Group, Inc.
Career Education Corporation
Grand Canyon Education, Inc.
Strayer Education, Inc.
Companies in the Former Self-Determined Peer Group
Apollo Group, Inc.
DeVry Education Group Inc.
I T T Educational Services, Inc.
Strayer Education, Inc.
Bridgepoint Education, Inc.
DeVry Education Group Inc.
Lincoln Educational Services Corporation
Career Education Corporation
Grand Canyon Education, Inc.
Lincoln Educational Services Corporation
Notes:
A. The lines represent quarterly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the quarterly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100 on 09/30/2011.
Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved.
65
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and operating data as of and for the
periods indicated. You should read the selected financial data set forth below together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial
statements included elsewhere in this Report on Form 10-K. The selected consolidated statement of operations
data and the selected consolidated balance sheet data as of and for the years ended September 30, 2016, 2015,
2014, 2013 and 2012 have been derived from our audited consolidated financial statements.
2016
Year Ended September 30,
2013
2014
2015
($'s in thousands, except per share amounts)
2012
Statement of Operations Data: (1)
Revenues (2)
Operating expenses:
Educational services and facilities
Selling, general and administrative (3)
Total operating expenses (3)
Income (loss) from operations (2) (3)
Interest (expense) income, net (4)
Equity in earnings of unconsolidated affiliate (5)
Other income, net
Income (loss) before taxes (2)
Income tax expense (benefit) (6)
Net income (loss) (3) (6)
Preferred stock dividends (7)
Income (loss) available for distribution (7)
Net income (loss) per share:
Basic
Diluted
Weighted average shares (in thousands):
Basic
Diluted
Cash dividends declared per common share
Other Data: (1)
Depreciation and amortization (5) (9)
Number of campuses
Average undergraduate enrollments
Balance Sheet Data: (1)
Cash and cash equivalents (7) (8)
Current assets (6) (7) (8)
Working capital (7)
Total assets (3) (5) (6)
Total shareholders' equity (7)
$ 347,146
$ 362,674
$ 378,393
$ 380,322
$ 413,629
194,395
171,374
365,769
(18,623)
(3,196)
342
(49)
(21,526)
26,170
194,416
177,481
371,897
(9,223)
(2,125)
527
140
(10,681)
(1,532)
$ (47,696) $ (9,149) $
1,424
—
$ (49,120) $ (9,149) $
200,054
172,002
372,056
6,337
(1,624)
471
563
5,747
3,710
2,037
—
2,037
$
$
$
(2.02) $
(2.02) $
(0.38) $
(0.38) $
0.08
0.08
24,313
24,313
0.04
24,391
24,391
0.32
24,640
24,920
0.40
$
$
199,540
174,757
374,297
6,025
234
—
655
6,914
3,013
3,901
—
3,901
0.16
0.16
24,515
24,704
0.40
$
$
$
$
$
211,979
187,397
399,376
14,253
302
—
545
15,100
5,985
9,115
—
9,115
0.37
0.37
24,711
24,937
0.30
$
$
$
$
$
$ 17,749
12
12,000
$ 19,155
12
13,200
$ 20,474
11
14,400
$ 22,156
11
15,000
$ 23,819
11
16,500
$ 119,045
$ 161,949
$ 67,389
$ 297,159
$ 136,614
$ 29,438
$ 108,057
$ 11,563
$ 274,302
$ 113,475
$ 38,985
$ 127,532
$ 25,197
$ 288,069
$ 133,192
$ 34,596
$ 134,079
$ 41,380
$ 280,194
$ 139,164
$ 44,611
$ 135,594
$ 35,847
$ 268,768
$ 146,388
(1) In 2015, we opened a campus in Long Beach, California, which contributed to the fluctuation in operations
66
and financial position during 2015 and 2016.
(2) The decline in our average undergraduate full-time student enrollment from 2012 - 2016 contributed to the
decrease in revenues, income from operations, and income before taxes.
(3) In 2015, we recorded a non-cash impairment charge of $12.4 million to write off goodwill for our MMI
Phoenix, Arizona campus based on our annual impairment test.
(4) In 2015 and 2014, we began recording interest expense related to amortization of the financing obligations
for our Long Beach, campus and for our Lisle, Illinois campus, respectively.
(5) In October 2014, we entered into a 15-year lease agreement for a build-to-suit facility related to the design
and construction of a new campus in Long Beach, California. We recorded approximately $20.3 million in
property and equipment and a financing obligation of approximately $12.3 million as of September 30, 2015
related to this lease agreement.
In 2014, we entered into amended lease agreements for certain buildings on our Orlando, Florida campus,
which extended the lease terms, modified the scheduled rental payments and allowed us to expand the square
footage of one building. Construction occurred during June through October 2014. For accounting purposes,
we were considered the owner during the construction period, and during that period, the existing building
and the addition were considered one unit of account. Accordingly, as of September 30, 2014, we recorded
the existing building and a corresponding short-term financing obligation of approximately $4.6 million on
our consolidated balance sheet. The facility was placed into service effective November 1, 2014. We determined
that we do not have continuing involvement after the construction period was complete, and that the lease will
be accounted for as an operating lease. Accordingly, the asset and the corresponding short-term financing
obligation were derecognized from our consolidated balance sheet.
In 2012, we entered into various agreements to relocate our Glendale Heights, Illinois campus to and design
and build a campus in Lisle, Illinois. Pursuant to these agreements, we invested approximately $4.0 million
to acquire an equity interest of approximately 28% in a related joint venture. As of September 30, 2014, we
recorded $33.5 million in property and equipment with a corresponding financing obligation. September 30,
2013 and 2012 balances reflect $25.2 million and $2.4 million, respectively, in property and equipment with
a corresponding amount recorded as a construction liability. We recognize our proportionate share of the joint
venture's net income or loss during each accounting period as a change in our investment.
(6) In 2016, we recorded a full valuation allowance on our deferred tax assets which impacted income tax expense
by $34.2 million for the year ended September 30, 2016.
(7) In 2016, we paid common stock cash dividends of $0.02 per share in December and March totaling $1.0
million. On June 9, 2016, our Board of Directors voted to eliminate the quarterly cash dividend on our common
stock. In 2015, we paid cash dividends of $0.10 per share in December, March and June totaling $7.3 million.
In 2014 and 2013, we paid quarterly cash dividends of $0.10 per share totaling $9.9 million and $9.8 million,
respectively. In 2012, we paid quarterly cash dividends of $0.10 per share in March, June, and September
totaling $7.4 million.
In 2016, we sold 700,000 shares of Series A Preferred Stock for $70.0 million in cash. We paid a preferred
stock cash dividend of $1.4 million on September 28, 2016.
In 2015, 2014, 2013 and 2012, we used cash and cash equivalents to repurchase approximately $6.6 million,
$1.4 million, $5.4 million and $1.8 million, respectively, of our common shares.
(8) In 2015, we purchased the majority of the buildings and land for our Houston, Texas campus. The purchase
67
price of $9.4 million, excluding fees, was allocated between buildings ($7.7 million) and land ($1.7 million)
based on the ratio of appraised values, which decreased cash and current assets. At the time of purchase, we
had leasehold improvements related to the purchased building recorded at $5.0 million in historical cost and
$4.3 million of accumulated depreciation. The historical cost and accumulated depreciation for these assets
were removed from the related classification and the net book value was recorded into building and building
improvements. The buildings and building improvements are being depreciated over a useful life of 30 years.
(9) Excludes depreciation of training equipment obtained in exchange for services of $1.3 million, $1.2 million,
$1.2 million and $1.1 million for the years ended September 30, 2016, 2015, 2014 and 2013, respectively.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with the "Selected Financial Data" and the consolidated
financial statements and the related notes included elsewhere in this Report on Form 10-K. This discussion contains
forward-looking statements that are based on our current expectations, estimates and projections about our business
and operations. Our actual results may differ materially from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors”
and elsewhere in this Report on Form 10-K.
General Overview
We are the leading provider of postsecondary education for students seeking careers as professional
automotive, diesel, collision repair, motorcycle and marine technicians as measured by total average undergraduate
full-time enrollment and graduates. We offer undergraduate degree or diploma programs at 12 campuses across
the United States. We also offer manufacturer specific advanced training programs, including student-paid electives,
at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers.
We have provided technical education for 51 years.
Our revenues consist principally of student tuition and fees derived from the programs we provide and
are presented after reductions related to discounts and scholarships we sponsor, refunds for students who withdraw
from our programs prior to specified dates and the portion of tuition students have funded through our proprietary
loan program. We generally recognize tuition revenue and fees ratably over the terms of the various programs we
offer. We supplement our tuition revenues with additional revenues from sales of textbooks and program supplies
and other revenues, such as those from BrokenMyth Studios or other non-Title IV sources, all of which are
recognized as sales occur or services are performed. In aggregate, these additional revenues represented
approximately 2% or less of our total revenues in each year for the three-year period ended September 30, 2016.
Tuition revenue and fees generally vary based on the average number of students enrolled and average tuition
charged per program.
Average undergraduate full-time student enrollments vary depending on, among other factors, the number
of continuing students at the beginning of a period, new student enrollments during the period, students who have
previously withdrawn but decide to re-enroll during the period, graduations and withdrawals during the period.
Our average undergraduate full-time student enrollments are influenced by: the attractiveness of our program
offerings to high school graduates and potential adult students; the effectiveness of our marketing efforts; the depth
of our industry relationships; the strength of employment markets and long term career prospects; the quality of
our instructors and student services professionals; the persistence of our students; the length of our education
programs; the availability of federal and alternative funding for our programs; the number of graduates of our
programs who elect to attend the advanced training programs we offer and general economic conditions. Our
introduction of additional program offerings at existing campuses and opening additional campuses is expected to
influence our average undergraduate full-time student enrollment. We currently offer start dates at our campuses
that range from every three to six weeks throughout the year in our undergraduate programs. The number of start
dates of advanced training programs varies by the duration of those programs and the needs of the manufacturers
which sponsor them.
Our tuition charges vary by type and length of our programs and the program level, such as undergraduate
or advanced training. We implemented tuition rate increases of up to 3% for the years ended September 30, 2016
and 2015, and 2% to 4% for the year ended September 30, 2014. We regularly evaluate our tuition pricing based
on individual campus markets, the competitive environment and ED regulations.
Most students at our campuses rely on funds received under various government-sponsored student
69
financial aid programs, predominantly Title IV Programs and various veterans benefits programs, to pay a
substantial portion of their tuition and other education-related expenses. Approximately 66% of our revenues, on
a cash basis, were collected from funds distributed under Title IV Programs for the year ended September 30, 2016.
This percentage differs from our Title IV percentage as calculated under the 90/10 rule due to the prescribed
treatment of certain Title IV stipends under the rule. Additionally, approximately 19% of our revenues, on a cash
basis, were collected from funds distributed under various veterans benefits programs for the year ended
September 30, 2016.
We extend credit for tuition and fees, for a limited period of time, to the majority of our students. Our
credit risk is mitigated through the students’ participation in federally funded financial aid and veterans benefit
programs unless students withdraw prior to the receipt by us of Title IV or veterans benefit funds for those students.
The financial aid and veterans benefits programs are subject to political and budgetary considerations. There is
no assurance that such funding will be maintained at current levels. Extensive and complex regulations govern
the financial assistance programs in which our students participate. Our administration of these programs is
periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation
of potential adverse actions, including a suspension, limitation, placement on reimbursement status or termination
proceeding, which could have a material adverse effect on our business.
If any of our institutions were to lose its eligibility to participate in federal student financial aid or veterans
benefit programs, the students at that institution, and other locations of that institution, would lose access to funds
derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. The
receipt of financial aid and veterans benefit funds reduces the students’ amounts due to us and has no impact on
revenue recognition, as the transfer relates to the source of funding for the costs of education which may occur
through Title IV, veterans benefit or other funds and resources available to the student. Additionally, we bear all
credit and collection risk for the portion of our student tuition that is funded through our proprietary loan program.
We categorize our operating expenses as (i) educational services and facilities and (ii) selling, general
and administrative.
Major components of educational services and facilities expenses include faculty and other campus
administration employees compensation and benefits, facility rent, maintenance, utilities, depreciation and
amortization of property and equipment used in the provision of educational services, tools, training aids, royalties
under our licensing arrangements and other costs directly associated with teaching our programs and providing
educational services to our students.
Selling, general and administrative expenses include compensation and benefits of employees who are
not directly associated with the provision of educational services, such as: executive management; finance and
central accounting; information technology; legal; human resources; marketing and student enrollment expenses,
including compensation and benefits of personnel employed in marketing and student admissions; costs of
professional services; bad debt expense; costs associated with the implementation and operation of our student
management and reporting system; rent for our corporate office headquarters; depreciation and amortization of
property and equipment that is not used in the provision of educational services and other costs that are incidental
to our operations. All marketing and student enrollment expenses are recognized in the period incurred. Costs
related to the opening of new facilities, excluding related capital expenditures, are expensed in the period incurred
or when services are provided.
2016 Overview
Operations
Lower student population levels as we began 2016, combined with lower new student starts throughout
the year, resulted in a 9.1% decline in our average undergraduate full-time student enrollment to approximately
70
12,000 students for the year ended September 30, 2016. We started approximately 11,300 students during the year
ended September 30, 2016, which represents a decrease of 8.9% as compared to a decrease of 8.8% for the year
ended September 30, 2015. The decrease in starts was primarily the result of certain macro-economic headwinds
and regulatory challenges.
Several factors continue to challenge our ability to start new students, including the following:
• Changes to ED's incentive compensation regulations, which became effective July 1, 2011,
limited the means by which we may compensate our admissions representatives and required
significant changes to our compensation and performance management processes;
• Competition for prospective students continues to increase from within our sector and from
market employers, as well as with traditional post-secondary educational institutions;
• The state of the general macro-economic environment and its impact on price sensitivity and the
ability and willingness of students and their families to incur debt;
• Unemployment; during periods when the unemployment rate declines or remains stable as it has
in recent years, prospective students have more employment options; and
• Adverse media coverage, legislative hearings, regulatory actions and investigations by attorneys
general and various agencies related to allegations of wrongdoing on the part of other companies
within the education and training services industry, which have cast the industry in a negative
light.
In response to these challenges, we continue to focus on our key strategies. We continue to add and renew
contracts with our OEM partners as well as other employers to provide career opportunities and tuition
reimbursement for our graduates. We are seeking opportunities to expand into new geographic markets either
organically or through strategic acquisitions. Additionally, we plan to begin offering two new programs, welding
and CNC (computer numeric control) machining, in 2017. We continue to work to help students choose course
and program structures that make getting an education more affordable and to balance our scholarship offerings
with increased financial support from employers of our graduates. During 2015, we launched an initiative designed
to shift perceptions and build advocacy with key policy makers and influencers. Finally, we remain focused on
operating our business as efficiently as possible and managing discretionary operating costs. In September 2016,
we implemented a Financial Improvement Plan (the Plan), the first step of which was a reduction in workforce
impacting approximately 70 employees, primarily at our corporate office. In November 2016, we completed an
additional reduction in workforce impacting approximately 75 employees, primarily at our campus locations. We
expect the Plan to deliver $25 million to $30 million in annualized cost savings coming from the reduction in our
workforce, changes to our marketing strategy and admissions structure as previously discussed and a number of
process improvement initiatives.
ED published guidance in November 2015 that eliminated certain restrictions on incentive compensation
for admissions representatives. Specifically, ED reconsidered its previous interpretation and stated that its
regulations do not prohibit compensation for admissions representatives that is based upon students’ graduation
from, or completion of, educational programs. Compensation based on enrolling students, however, continues to
be prohibited. Please see further discussion in “Business - Regulatory Environment - Regulation of Federal Student
Financial Aid Programs - Incentive Compensation” included elsewhere in this Report on Form 10-K. We have
begun making adjustments to the compensation practices for our admissions representatives which we believe will
be compliant with ED's November 2015 guidance. The transition period for the new compensation structure will
continue through calendar year 2018. We will continue to evaluate other compensation options under these
regulations and guidance.
Our revenues for the year ended September 30, 2016 were $347.1 million, a decline of $15.6 million, or
4.3%, from the prior year. Our operating results were due in part to the decline in revenues, which, while partially
offset by tuition rate increases, were negatively impacted by the decline in our average undergraduate full-time
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student enrollment. Additionally, our results of operations were impacted by the opening of our new campus in
Long Beach, California in August 2015. For the year ended September 30, 2016, this campus had revenues of
$12.2 million and operating expenses of $20.0 million, including corporate overhead allocations of $6.4 million.
Operating results were also impacted by an increase in compensation expense, which was partially offset by
decreases in advertising, depreciation and amortization, supplies and maintenance and tools and training aids
expenses. Included in compensation expense was severance of approximately $3.9 million related to the September
2016 reduction in workforce. We incurred a net loss of $47.7 million compared to $9.1 million in the prior year,
primarily as a result of the determination that an additional valuation allowance on our deferred tax assets was
necessary, which impacted income tax expense by $34.2 million. The overall decline in revenues for the period
was also a contributing factor to the net loss incurred during the year ended September 30, 2016.
Valuation
Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets,
which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax
purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. Assessing the
need for a valuation allowance requires significant judgment, and we consider all available evidence, including
our historical profitability and projections of future taxable income.
During the three months ended March 31, 2016, there were several pieces of negative evidence that
contributed to our conclusion that a valuation allowance was appropriate against all deferred tax assets that rely
upon future taxable income for their realization. This negative evidence included (1) a significant pre-tax loss
during the three months ended March 31, 2016, (2) deterioration in leading indicators, such as applications and
new student starts, and projected population during the three months ended March 31, 2016, which negatively
impacts projected future operating results, (3) financial projections that indicated we will be in a 3-year cumulative
loss position during 2016 and (4) the continued challenging business and regulatory environment facing for-profit
education institutions.
As a result of our assessment, we recorded a full valuation allowance during the three months ended
March 31, 2016. We will maintain a valuation allowance on our deferred tax assets until sufficient positive evidence
exists to support its reversal. See Note 13 of the notes to our Consolidated Financial Statements within Part II,
Item 8 of this Report on Form 10-K for further discussion.
Transactions
On June 24, 2016, we entered into a Purchase Agreement with Coliseum Holdings I, LLC to sell 700,000
shares of Series A Preferred Stock for a total purchase price of $70.0 million. The proceeds from the offering are
intended to be used to fund strategic long-term growth initiatives, including the expansion to new markets of
campuses on a scale similar to our Long Beach, California and Dallas/Ft. Worth, Texas campuses and the creation
of new programs in existing markets with under-utilized campus facilities. Additionally, we may use the proceeds
to fund strategic acquisitions that complement our core business. See Note 15 of the notes to our Consolidated
Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.
In February 2016, we made an investment in and entered into a licensing agreement with Pro-MECH, a
company that provides comprehensive technician development programs and shop operations services. This
investment, which included $0.7 million in cash as well as the conversion of a $0.3 million note receivable extended
during the first quarter of 2016, resulted in our ownership of 25% of the outstanding equity interests of this company.
During the three months ended September 30, 2016, we determined that our investment was impaired and recorded
an impairment charge of $0.8 million. See Note 10 of the notes to our Consolidated Financial Statements within
Part II, Item 8 of this Report on Form 10-K for further discussion.
72
Also in February 2016, we acquired substantially all of the assets of BMS, a New York-based full
production studio that offers a variety of services, including system architecture design, application and website
development, interactive media development and digital technical training for diesel, medical and industrial
equipment companies. The cash purchase price for this transaction was $1.5 million, and the acquisition includes
potential contingent consideration payments in the future of up to $0.9 million. See Note 11 of the notes to our
Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K for further discussion.
Veterans' Benefits
The percentage of our revenues, on a cash basis, which were collected from funds distributed under various
veterans' benefits programs was approximately 19%, 20% and 20% for the years ended September 30, 2016, 2015
and 2014, respectively.
There continues to be Congressional activity around the requirements of the 90/10 Rule, such as reducing
the 90% maximum under the rule to 85% or including military and veteran funding in the 90% portion of the
calculation. Potential changes to the 90/10 Rule could negatively impact our eligibility to participate in Title IV
Programs. A loss of eligibility would adversely affect our students’ access to Title IV Program funds they need to
pay their educational expenses.
As described in “Business - Regulatory Environment - Other Federal and State Programs - Veterans'
Benefits” included elsewhere in this Report on Form 10-K, we are subject to limitations on the percentage of
students per program receiving benefits under certain veterans’ benefits programs, unless the program qualifies
for certain exemptions. If the VA determines that an institution is out of compliance with the applicable limit, the
VA will continue to provide benefits to current students but will not provide benefits to newly enrolled students
until the institution demonstrates compliance.
Our access to military installations for student recruitment has become more limited due to recent changes
in the Transition Assistance Program (Transition Goals, Plans, Success) and increased enforcement of the
requirement to possess an MOU with certain individual military installations. Each of our institutions has an MOU
with the U.S. DOD. We have MOUs with certain key individual installations and are pursuing MOUs at additional
locations. We continue to strengthen and develop relationships with our existing contacts and with new contacts
in order to maintain and rebuild our access to military installations.
Automotive Technology and Diesel Technology II Integration
We currently offer the Automotive Technology and Diesel Technology II curricula at our Avondale,
Arizona; Dallas/Ft. Worth, Texas; Long Beach, California; Orlando, Florida and Sacramento, California campuses.
We plan to offer this curricula at our Rancho Cucamonga, California campus in 2017.
As discussed in “Business - Regulatory Environment - Other Federal and State Programs - Veterans'
Benefits” included elsewhere in this Form 10-K, the VA shares responsibility for VA benefit approval and oversight
with designated SAAs. SAAs play a critical role in evaluating institutions and their programs to determine if they
meet VA benefit eligibility requirements. Processes and approval criterion as well as interpretation of applicable
requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval
in all states.
Since July 2012, the Texas SAA has approved the use of Veterans benefits to fund tuition under our original
Automotive Technology and Diesel Technology II delivery method at our Dallas/Ft. Worth, Texas campus. During
2015, we were in contact with the Texas SAA regarding a transition to an alternative delivery method for veterans
at this campus, and the enrollment of veteran students at this campus was discontinued in July 2015. The Texas
SAA had communicated that the program at this campus remained approved until April 15, 2016. We submitted
modifications to the Accrediting Commission of Career Schools and Colleges (ACCSC) and received ACCSC
73
approval in February 2016 and state approval in March 2016. We have since gained approval to resume enrolling
veteran students in the modified programs and began re-enrolling in July 2016.
Graduate Employment
Identifying employment opportunities and preparing our graduates for these careers is critical to our ability
to help our graduates benefit from their education. Accordingly, we dedicate significant resources to maintaining
an effective employment team, as described in "Business - Graduate Employment" included in Part I, Item 1 of
this Report on Form 10-K. We believe that our graduate employment services provide our students with a compelling
value proposition and enhance the employment opportunities for our graduates. We saw improvement in the
graduate employment rate for our marine program, and declines in the graduate employment rates for our collision
repair and motorcycle programs for students who graduated in 2015, as compared to 2014; the graduate employment
rate for our automotive program remained consistent with the prior year. While demand for our graduates remains
strong, the decline in the rate for certain of our programs was due to internal operational challenges that resulted
in an employment verification backlog. We have worked to address such challenges throughout 2016.
Our employment rates for both 2015 and 2014 graduates was 88%. The employment calculation is based
on all graduates, including those that completed manufacturer specific advanced training programs, from October
1, 2014 to September 30, 2015 and October 1, 2013 to September 30, 2014, respectively, excluding graduates not
available for employment because of continuing education, military service, health, incarceration, death or
international student status. Graduates are counted as employed based on a verified understanding of the graduate's
job duties to assess and confirm that the graduates primary job responsibilities are in his or her field of study. See
Business - Graduate Employment" in this Report on Form 10-K for further discussion of our graduate employment
activities. For 2015, we had approximately 9,700 total graduates, of which approximately 9,100 were available
for employment. Of those graduates available for employment, approximately 8,000 were employed within one
year of their graduation date, for a total of 88%. For 2014, we had approximately 9,900 total graduates, of which
approximately 9,200 were available for employment. Of those graduates available for employment, approximately
8,100 were employed within one year of their graduation date, for a total of 88%.
Regulatory Environment
For a detailed discussion of the regulatory environment and related risks, see “Business - Regulatory
Environment”, and Item 1A, “Risk Factors”, included elsewhere in this Report on Form 10-K.
Regulation of Federal Student Financial Aid Programs
As anticipated, upon review of our 2015 financial statements and composite score, ED communicated
that we could elect the "Zone Alternative" option described in “Business - Regulatory Environment - Regulation
of Federal Student Financial Aid Programs” included elsewhere in this Report on Form 10-K, or post a letter of
credit representing 50% of the Title IV Program funds received by us during 2015. We elected the "Zone Alternative"
option and began disbursing funds under the HCM1 method on October 10, 2016. In connection with the issuance
of our Series A Preferred Stock in June 2016, we received a request from ED to provide a monthly student roster
and a biweekly cash flow projection. ED extended this requirement as part of the "Zone Alternative" option outlined
above. We began complying with these reporting requirements in July 2016.
For our 2016 fiscal year, we calculated our composite score to be 1.7. However, the composite score
calculations and resulting requirements imposed on our institutions are subject to determination by ED once it
receives and reviews our audited financial statements. Moreover, ED may recalculate our composite score to
account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to
Repayment Regulations. See “Regulation of Federal Student Financial Aid Programs - Defense To Repayment
Regulations” included elsewhere in this Report on Form 10-K. If ED determines that our composite score is 1.5
or higher, our composite score would be high enough for our institutions to be deemed financially responsible and
74
could result in ED no longer requiring us to comply with the "Zone Alternative" requirements or the requirement
to use the HCM1 payment method. Such determination would be subject to the absence of other factors supporting
these requirements.
On November 1, 2016, ED published final regulations in the Federal Register establishing new rules
regarding, among other things, the ability of borrowers to obtain discharges of their obligations to repay certain
Title IV loans and for ED to initiate a proceeding to collect from the institution the discharged and returned amounts,
the extensive list of circumstances that may require institutions to provide letters of credit or other financial
protection to ED. The new regulations, among other things:
• Establish amended procedures and standards for borrowers, either individually or as a group, to assert
through an ED-administered process a defense to the borrowers’ obligation to repay certain Title IV loans
based on certain acts or omissions of the institution. The regulations also expand the types of defenses
available for loans first disbursed on or after July 1, 2017. If ED approves the borrower’s defense to
repayment through the applicable administrative process established in the proposed regulations, ED may
discharge the borrower’s obligation to repay some or all of the borrower’s student loans and may initiate
a separate proceeding to collect from the institution the discharged and returned amounts.
• Revise the financial responsibility regulations to expand the list of actions or events that would require
an institution to provide ED with a letter of credit or other form of acceptable financial protection and
potentially be subject to other conditions and requirements. The specified list of events is extensive and
includes, among other potential triggers, certain debts or liabilities arising from settlements or final
judgments in judicial or administrative proceedings and certain lawsuits pending for 120 days and initiated
by a federal or state authority against the institution with respect to Direct Loans or educational services;
certain other lawsuits in which the institution’s summary judgment motion was denied or not filed, certain
closures of one or more of the institution’s locations, one or more gainful employment programs with
gainful employment rates that could result in the program becoming ineligible in the next award year,
certain withdrawals of owner’s equity from the institution including by dividend, failure to comply with
the 90/10 Rule for the most recently completed fiscal year, SEC warning that it may suspend trading on
the institution’s stock, failure to file certain reports with the SEC, the exchange on which the institution’s
stock is traded notifying the institution that it is not in compliance with exchange requirements or that its
stock is delisted, cohort default rates of at least 30 percent for its two most recent rates, certain significant
fluctuations in Title IV funding, certain citations for failure to comply with state agency requirements,
failure to comply with yet to be developed ED financial stress tests, high annual dropout rates, the institution
being placed on probation or issued a show-cause or similar action by its accrediting agency, certain
violations of loan agreements, expected or pending claims for borrower relief discharges, and certain
other events that ED might identify as reasonably likely to have a material adverse effect on the financial
condition, business or results of operations of the institutions.
• Require proprietary institutions with student loan repayment rates, as defined in the regulations, below
prescribed thresholds to provide an ED-prepared warning to prospective and enrolled students, as well
as placement of the warning on its website and in all promotional materials and advertisements.
•
Prohibit the use and reliance upon certain contractual provisions regarding dispute resolution processes,
such as pre-dispute arbitration agreements or class action waivers, and require certain notifications,
contract provisions and disclosures by institutions regarding students’ ability to participate in certain class
action lawsuits or initiate certain lawsuits instead of through arbitration.
For a more extended summary of the final rules, see “Business - Regulatory Environment - Regulation of Federal
Student Financial Aid Programs - Defense to Repayment Regulations” and “Business - Regulatory Environment
- Financial Responsibility Regulations” included elsewhere in this Report on Form 10-K. The new regulations
have a general effective date of July 1, 2017.
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90/10 Rule
A for-profit institution loses its eligibility to participate in Title IV Programs if it derives more than 90%
of its revenue from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula
mandated by ED. The loss of such eligibility would begin on the first day following the conclusion of the second
consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already
received by the institution and its students during a period of ineligibility would have to be returned to ED or a
lender, if applicable. Additionally, if an institution exceeds the 90% level for a single year, ED will place the
institution on provisional certification for a period of at least two years, and could impose other restrictions or
conditions on the institution's Title IV eligibility. For the years ended September 30, 2016, 2015 and 2014,
approximately 72%, 73% and 74%, respectively, of our revenues, on a cash basis, were derived from funds
distributed under Title IV Programs, as calculated under the 90/10 rule.
2017 Outlook
For the year ending September 30, 2017, we expect new student starts to be down in the low single digits.
Combined with the number of students currently in school and the timing of the anticipated start growth, we expect
our average student population to be down in the mid to high single digits as a percentage compared with the year
ended September 30, 2016. While annual tuition increases will slightly offset the decline in average students, we
expect revenue to be down in the low to mid single digits. We implemented a Financial Improvement Plan as
previously discussed, which we expect to deliver $25 million to $30 million in annualized cost savings. We anticipate
the Financial Improvement Plan will result in approximately breakeven operating income and positive EBITDA
despite the decline in revenue. Capital expenditures are expected to be approximately $12.5 million to $13.5 million
for the year ending September 30, 2017. Due to the seasonality of our business and normal fluctuations in student
populations, we would expect volatility in our quarterly results.
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Results of Operations
The following table sets forth selected statements of operations data as a percentage of revenues for
each of the periods indicated.
Revenues
Operating expenses:
Educational services and facilities
Selling, general and administrative
Total operating expenses
Income (loss) from operations
Interest income (expense), net
Other income
Total other income (expense)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Income (loss) available for distribution
Year Ended September 30,
2015
2014
2016
100.0 %
100.0 %
100 %
56.0 %
49.4 %
105.4 %
(5.4)%
(0.9)%
0.1 %
(0.8)%
(6.2)%
7.5 %
(13.7)%
0.4 %
(14.1)%
53.6 %
48.9 %
102.5 %
(2.5)%
(0.5)%
0.1 %
(0.4)%
(2.9)%
(0.4)%
(2.5)%
— %
(2.5)%
52.9 %
45.4 %
98.3 %
1.7 %
(0.5)%
0.3 %
(0.2)%
1.5 %
1.0 %
0.5 %
— %
0.5 %
Year Ended September 30, 2016 Compared to Year Ended September 30, 2015
Revenues. Our revenues for the year ended September 30, 2016 were $347.1 million, a decrease of
$15.6 million, or 4.3%, as compared to revenues of $362.7 million for the year ended September 30, 2015. The
9.1% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of
approximately $32.3 million. Partially offsetting this decrease was one additional earning day in 2016, which
contributed $1.3 million in revenue. Additionally, the decrease was partially offset by tuition rate increases of up
to 3%, depending on the program. Our revenues for the years ended September 30, 2016 and 2015 excluded $18.7
million and $21.1 million, respectively, of tuition related to students participating in our proprietary loan program.
We recognized $7.2 million and $5.4 million of revenues and interest under the proprietary loan program for the
years ended September 30, 2016 and 2015, respectively. Revenues for our Long Beach, California campus were
$12.2 million for the year ended September 30, 2016, as compared to $0.7 million for the year ended September
30, 2015.
Educational services and facilities expenses. Our educational services and facilities expenses for the
year ended September 30, 2016 were $194.4 million, consistent with $194.4 million for the year ended
September 30, 2015.
Our educational services and facilities expenses for our Long Beach, California campus were $11.2 million
and $4.1 million for the years ended September 30, 2016 and 2015, respectively, including corporate allocations
of $0.8 million and $0.2 million, respectively.
77
The following table sets forth the significant components of our educational services and facilities
expenses:
Salaries expense
Employee benefits and tax
Bonus expense
Stock-based compensation
Compensation and related costs
Occupancy costs
Depreciation and amortization expense
Other educational services and facilities expense
Supplies and maintenance
Tools and training aids expense
Year Ended September 30,
2016
2015
$
(In thousands)
88,240
$
17,763
1,145
280
107,428
36,292
16,548
18,597
8,924
6,606
$
194,395
$
86,025
15,643
1,225
294
103,187
36,127
17,805
18,357
9,981
8,959
194,416
Compensation and related costs increased $4.2 million for the year ended September 30, 2016, as
compared to the prior year:
•
Salaries expense increased $2.2 million primarily due to normal salary merit increases.
Additionally, we recorded severance expense of $0.4 million related to the previously discussed reduction
in workforce undertaken in September 2016, which primarily impacted non-instructor positions and
related salaries expense.
•
medical claims.
Employee benefits and tax increased $2.2 million as a result of an increase in self-insurance
Compensation and related costs for our Long Beach, California campus were $4.6 million for the year
ended September 30, 2016 as compared to $0.9 million in the prior year.
In November 2016, we completed a second reduction in workforce primarily impacting campus positions,
resulting in severance expense of approximately $1.2 million. Combined with the September 2016 reduction, we
expect the restructuring activity to result in savings of approximately $5.3 million in compensation costs during
the year ending September 30, 2017, excluding the impact of severance expense.
Depreciation and amortization expense decreased $1.3 million during the year ended September 30, 2016
as a higher percentage of our fixed assets are fully depreciated.
Supplies and maintenance expense decreased $1.1 million during the year ended September 30, 2016
primarily as a result of cost savings efforts across our campus locations.
Tools and training aids expense decreased $2.4 million during the year ended September 30, 2016. The
decrease was attributable to a higher level of purchases in the prior year related to the opening of our Long Beach,
California campus and the rollout of our diesel and industrial programs at our Orlando, Florida campus in January
2015. Additionally, there was a lower level of purchases across our campus locations in the current year.
78
Selling, general and administrative expenses. Our selling, general and administrative expenses for the
year ended September 30, 2016 were $171.4 million, representing a decrease of $6.1 million, or 3.4%, as compared
to $177.5 million for the year ended September 30, 2015.
Our selling, general and administrative expenses for our Long Beach, California campus were $8.8 million
and $3.5 million for the years ended September 30, 2016 and 2015, respectively, including corporate allocations
of $5.6 million and $2.3 million, respectively.
The following table sets forth the significant components of our selling, general and administrative
expenses:
Salaries expense
Employee benefits and tax
Bonus expense
Stock-based compensation
Compensation and related costs
Advertising expense
Other selling, general and administrative expenses
Goodwill impairment expense
Depreciation and amortization expense
Bad debt expense
Year Ended September 30,
2016
2015
$
(In thousands)
71,153
$
15,817
4,793
4,624
96,387
41,191
30,100
—
2,543
1,153
66,570
13,221
4,016
3,971
87,778
44,688
28,551
12,357
2,518
1,589
$
171,374
$
177,481
Compensation and related costs increased $8.6 million for the year ended September 30, 2016, as
compared to the prior year:
Salaries expense increased approximately $4.6 million. We recorded $2.7 million in severance
•
charges as a result of the reduction in workforce undertaken in September 2016. The remainder of the
increase was primarily due to normal salary merit increases. The increases were partially offset by savings
realized following the restructuring of our campus admissions organization in June 2016.
•
medical claims.
Employee benefits and tax increased $2.6 million as a result of an increase in self-insurance
•
Bonus expense increased $0.8 million primarily due to attainment of both financial and non-
financial metrics at a rate higher than the prior year. Additionally, bonus expense increased as a result of
long-term incentive cash awards granted beginning in 2014 in lieu of stock compensation for certain
employees.
Compensation and related costs for our Long Beach, California campus were $3.2 million for the year
ended September 30, 2016 as compared to $1.2 million in the prior year.
In November 2016, we completed a second reduction in workforce primarily impacting campus positions,
resulting in severance expense of approximately $0.1 million. Combined with the September 2016 reduction, we
expect the restructuring activity to result in savings of approximately $6.9 million in compensation costs during
the year ending September 30, 2017, excluding the impact of severance expense.
79
Advertising expense decreased $3.5 million for the year ended September 30, 2016, as compared to the
prior year. The decrease was primarily attributable to lower inquiry generation expenses, as we reduced spending
on lower quality lead sources in a continued effort to optimize our media mix. Additionally, spending on tradeshows
and on local advertising decreased related to the prior year, which included expense related to the opening of our
Long Beach, California campus in August 2015. We continue to focus on identifying the optimal balance between
quality and quantity of inquiries from potential students. Advertising expense as a percentage of revenues for the
year ended September 30, 2016 was approximately 11.9%. We anticipate our advertising expense will be in the
range of 10.5%—11.5% of revenue for the year ending September 30, 2017.
We recorded a non-cash goodwill impairment charge of $12.4 million during 2015 to write off the full
carrying value of goodwill at our MMI Phoenix, Arizona campus. This non-cash charge had no impact on liquidity
or cash flows from operations. No goodwill impairment was incurred in 2016.
Other expense. Our other expense for the year ended September 30, 2016 was $2.9 million, an increase
of $1.4 million as compared to $1.5 million for the year ended September 30, 2015. The increase is primarily
attributable to an increase in interest expense due to amortization of the financing obligations related to our Lisle,
Illinois and Long Beach, California campuses. See Note 9 of the notes to our Consolidated Financial Statements
within Part II, Item 8 of this Report on Form 10-K for further discussion. Additionally, other expense includes an
impairment charge of $0.8 million related to our investment in Pro-MECH for the year ended September 30, 2016.
Income taxes. Our income tax expense for the year ended September 30, 2016 was $26.2 million, or
121.6% of pre-tax loss, compared to an income tax benefit of $1.5 million, or 14.3% of pre-tax loss, for the year
ended September 30, 2015. The increase in income tax expense was due primarily to the increase in the valuation
allowance established on our deferred tax assets. See Note 13 of the notes to our Consolidated Financial Statements
within Part II, Item 8 of this Report on Form 10-K for further discussion of the valuation allowance. The effective
income tax rate in each period also differed from the federal statutory tax rate of 35% as a result of state income
taxes, net of related federal income tax benefits, and due to tax expense related to share-based compensation.
At the time of our initial public offering in December 2003, we began awarding stock-based compensation
in the form of stock options with a contractual life of 10 years. In subsequent years, we have awarded other forms
of stock-based compensation with varying terms. In 2006, we adopted the authoritative guidance on accounting
for stock-based compensation, which gave rise to deferred tax assets related to stock-based compensation timing
differences between book expense and tax deductions, as well as a pro forma pool of windfall tax benefits. When
tax deductions from stock-based compensation awards are less than the cumulative book compensation expense,
the tax effect of the resulting difference (shortfall) is charged first to additional paid-in capital to the extent of our
pro forma pool of windfall tax benefits, with any remainder written off to income tax expense. Such write-offs
may be the result of expiration, exercise or vesting of prior stock-based compensation awards. The write-off of the
deferred tax asset is a non-cash charge and is not a result of current operations.
During the six months ended March 31, 2016, the write-off of the deferred tax asset related to stock-based
compensation resulted in income tax expense of less than $0.1 million. As of March 31, 2016, we recorded a full
valuation allowance on our deferred tax assets. As a result, any write-offs of deferred tax assets related to stock-
based compensation will have no impact on income tax expense, until such time that sufficient positive evidence
exists to support the reversal of the deferred tax asset valuation allowance. Subsequent to March 31, 2016, we
wrote off $1.8 million related to stock-based compensation.
Under Section 382 of the Internal Revenue Code (IRC), for income tax purposes only, we underwent a
change in ownership as a result of the Series A Preferred Stock issuance in June 2016. Under the IRC, a change
in ownership occurs when a five percent shareholder, as measured by ownership value, increases their ownership
in a loss corporation by more than 50 percentage points during the defined testing period; both common and
preferred stock are included in the determination of ownership value. Since the purchaser acquired ownership
exceeding 50 percent of our total ownership value, this transaction qualified as a change in ownership under section
80
382 of the IRC only. Accordingly, certain deductions and losses will be subject to an annual Section 382 limitation.
The limitation will affect the timing of when these deductions and losses can be used and, in turn, will decrease
or eliminate the amount of tax refund that we anticipate to receive by carrying back the losses that we may incur
in future periods. The limitation may cause us to make income tax payments even if a pre-tax loss is recorded in
future periods. The limitation may also cause the deductions and losses to expire unused.
Net income (loss). As a result of the foregoing, we reported net loss for the year ended September 30,
2016 of $47.7 million, as compared to $9.1 million for the year ended September 30, 2015.
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 this sale, we paid a preferred stock cash
dividend of $1.4 million on September 28, 2016. See Note 15 of the notes to our Consolidated Financial Statements
within Part II, Item 8 of this Report on Form 10-K for further discussion of the preferred stock transaction.
Income (loss) available for distribution. Income (loss) available for distribution refers to net income or
loss reduced by dividends on our Series A Preferred Stock. As a result of the foregoing, we reported a loss available
for distribution for the year ended September 30, 2016 of $49.1 million, as compared to $9.1 million for the year
ended September 30, 2015.
Year Ended September 30, 2015 Compared to Year Ended September 30, 2014
Revenues. Our revenues for the year ended September 30, 2015 were $362.7 million, a decrease of
$15.7 million, or 4.2%, as compared to revenues of $378.4 million for the year ended September 30, 2014. The
8.3% decrease in our average undergraduate full-time student enrollment resulted in a decrease in revenues of
approximately $30.2 million. The decrease was partially offset by tuition rate increases of up to 5%, depending
on the program. Our revenues for the years ended September 30, 2015 and 2014 excluded $21.1 million and $23.2
million, respectively, of tuition related to students participating in our proprietary loan program. We recognized
$5.4 million and $3.5 million of revenues and interest under the proprietary loan program for the years ended
September 30, 2015 and 2014, respectively.
Educational services and facilities expenses. Our educational services and facilities expenses for the
year ended September 30, 2015 were $194.4 million, representing a decrease of $5.7 million, or 2.8%, as compared
to $200.1 million for the year ended September 30, 2014.
Our educational services and facilities expenses for the year ended September 30, 2015 for our Long
Beach, California campus were $4.1 million, including corporate allocations of $0.2 million.
81
The following table sets forth the significant components of our educational services and facilities
expenses:
Salaries expense
Employee benefits and tax
Bonus expense
Stock-based compensation
Compensation and related costs
Occupancy costs
Depreciation and amortization expense
Other educational services and facilities expense
Supplies and maintenance
Tools and training aids expense
Contract services expense
Year Ended September 30,
2015
2014
$
(In thousands)
86,025
$
15,643
1,225
294
103,187
36,127
17,805
14,100
9,981
8,959
4,257
87,809
16,566
816
587
105,778
36,270
18,469
15,109
9,647
9,237
5,544
Compensation and related costs decreased $2.6 million for the year ended September 30, 2015, as
compared to the prior year:
$
194,416
$
200,054
•
Salaries expense decreased $1.8 million due to the restructuring undertaken in September and
October 2014 and planned employee attrition during the year resulting from our focus on controlling
costs. The restructuring and attrition primarily impacted non-instructor positions and related salaries
expense, resulting in a decrease of approximately $2.7 million for the year ended September 30, 2015.
Instructor salaries remained consistent with the prior year. The decreases were partially offset by normal
salary merit increases.
•
as well as a decrease in self-insurance medical claims.
Employee benefits and tax decreased $1.0 million as a result of the decrease in salaries expense
•
Bonus expense increased $0.4 million primarily due to attainment of non-financial metrics at a
rate higher than the prior year. Additionally, bonus expense increased as a result of long-term incentive
cash awards granted during September 2014 in lieu of stock compensation for certain employees.
Compensation and related costs for our Long Beach, California campus for the year ended September 30,
2015 were $0.9 million, including corporate allocations of $0.1 million.
Contract services expense decreased $1.2 million during the year ended September 30, 2015, as compared
to the same period in the prior year. The decrease was primarily due to expenses incurred in the prior year comparable
period in support of the relocation of our Glendale Heights, Illinois campus to Lisle, Illinois as well as expenses
associated with outsourcing certain financial aid processes.
82
Selling, general and administrative expenses. Our selling, general and administrative expenses for the
year ended September 30, 2015 were $177.5 million, representing an increase of $5.5 million, or 3.2%, as compared
to $172.0 million for the year ended September 30, 2014.
Our selling, general and administrative expenses for the year ended September 30, 2015 for our Long
Beach, California campus were $3.5 million, including corporate allocations of $2.3 million.
The following table sets forth the significant components of our selling, general and administrative
expenses:
Salaries expense
Employee benefits and tax
Bonus expense
Stock-based compensation
Compensation and related costs
Advertising expense
Other selling, general and administrative expenses
Goodwill impairment expense
Contract services expense
Depreciation and amortization expense
Bad debt expense
Year Ended September 30,
2015
2014
$
(In thousands)
66,570
$
13,221
4,016
3,971
87,778
44,688
23,965
12,357
4,586
2,518
1,589
72,435
14,886
2,759
5,134
95,214
39,221
25,673
—
4,702
3,220
3,972
$
177,481
$
172,002
Compensation and related costs decreased $7.4 million for the year ended September 30, 2015, as
compared to the prior year:
Salaries expense decreased approximately $5.8 million primarily due to the restructuring
•
undertaken in September and October 2014 and planned employee attrition over the last year resulting
from our focus on controlling costs. The restructuring primarily impacted admissions employees and
related salaries expense. The decrease was partially offset by normal salary merit increases.
Severance charges had a minimal impact on the year ended September 30, 2015 as compared to
•
the prior year, as charges for the second phase of the restructuring undertaken in October 2014 and for
other employee turnover were primarily offset by severance charges related to the first phase of the
restructuring in September 2014.
•
as well as a decrease in self-insurance medical claims.
Employee benefits and tax decreased $1.7 million as a result of the decrease in salaries expense
•
over the past several years.
Stock compensation decreased $1.1 million primarily due to a reduction in overall grant levels
•
Bonus expense increased $1.2 million primarily due to attainment of non-financial metrics at a
rate higher than the prior year. Additionally, bonus expense increased as a result of long-term incentive
cash awards granted during September 2014 in lieu of stock compensation for certain employees.
Compensation and related costs for our Long Beach, California campus for the year ended September 30,
2015 were $1.2 million, including corporate allocations of $0.4 million.
83
Advertising expense increased $5.5 million for the year ended September 30, 2015, as compared to the
prior year. The increases were primarily attributable to higher inquiry generation expenses, as we continue to invest
in efforts to optimize our media mix; additionally, competitive pressures led to price increases and a tighter market
for television and internet advertising. Partially offsetting the increase was a decrease in production costs due to
certain commercial and direct mail campaigns completed in the prior year. We continue to focus on identifying
the optimal balance between quality and quantity of inquiries from potential students. Advertising expense as a
percentage of revenues for the year ended September 30, 2015 was approximately 12.3%.
We recorded a non-cash goodwill impairment charge of $12.4 million at September 30, 2015 to write off
the full carrying value of goodwill at our MMI Phoenix, Arizona campus. This non-cash charge had no impact on
liquidity or cash flows from operations. There was no impairment related to our MMI Orlando, Florida campus
for the year ended September 30, 2015. No goodwill impairment was incurred in 2014.
Bad debt expense decreased $2.4 million for the year ended September 30, 2015 as compared to the prior
year. During the three months ended March 31, 2015, we reversed approximately $1.0 million of bad debt expense
recorded in 2011 and 2012 for processing issues related to student funds received from a non-Title IV federal
funding agency. Based on communication with the agency, we determined it was no longer probable that we will
be required to return such funds.
Other expense. Our other expense for the year ended September 30, 2015 was $1.5 million, an increase
of $0.9 million as compared to $0.6 million for the year ended September 30, 2014. The increase is primarily
attributable to an increase in interest expense related to amortization of the financing obligation related to our Lisle,
Illinois and Long Beach, California campuses.
Income taxes. Our income tax benefit for the year ended September 30, 2015 was $1.5 million, or 14.3%
of pre-tax loss, compared to income tax expense of $3.7 million, or 64.6% of pre-tax income, for the year ended
September 30, 2014. The effective income tax rate in each period differed from the federal statutory tax rate of
35% primarily as a result of state income taxes, net of related federal income tax benefits, and an increase in tax
expense related to share-based compensation during the year ended September 30, 2015.
At the time of our initial public offering in December 2003, we began awarding stock-based compensation
in the form of stock options with a contractual life of 10 years. In subsequent years, we have awarded other forms
of stock-based compensation with varying terms. In 2006, we adopted the authoritative guidance on accounting
for stock-based compensation, which gave rise to deferred tax assets related to stock-based compensation timing
differences between book expense and tax deductions, as well as a pro forma pool of windfall tax benefits. When
tax deductions from stock-based compensation awards are less than the cumulative book compensation expense,
the tax effect of the resulting difference (shortfall) is charged first to additional paid-in capital to the extent of our
pro forma pool of windfall tax benefits, with any remainder written off to income tax expense. Such write-offs
may be the result of expiration, exercise or vesting of prior stock-based compensation awards. The write-off of the
deferred tax asset is a non-cash charge and is not a result of current operations.
The write-off of the deferred tax asset resulted in $1.8 million in income tax expense for the year ended
September 30, 2015.
Net income (loss). As a result of the foregoing, we reported net loss for the year ended September 30,
2015 of $9.1 million, as compared to net income of $2.0 million for the year ended September 30, 2014.
Non-GAAP financial measures
Our adjusted earnings before interest, tax, depreciation and amortization (adjusted EBITDA) for the years
ended September 30, 2016, 2015 and 2014 were $0.8 million $24.1 million and $29.1 million, respectively. Adjusted
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,
84
this measure helps compare our performance on a consistent basis across time periods. 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 to be 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 adjusted 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.
Adjusted EBITDA reconciles to net income as follows:
Net income (loss)
Interest expense, net
Income tax expense (benefit)
Depreciation and amortization (1)
Goodwill impairment expense
Adjusted EBITDA
Year Ended September 30,
2015
2014
2016
$
$
(47,696) $
3,196
26,170
19,091
—
761
$
(9,149) $
2,125
(1,532)
20,323
12,357
24,124
$
2,037
1,624
3,710
21,689
—
29,060
(1) Includes depreciation of training equipment obtained in exchange for services of $1.3 million, $1.2 million and
$1.2 million for the years ended September 30, 2016, 2015 and 2014, respectively.
Student retention/completion rate
Our consolidated student retention/completion rate is based on new students that began one of our programs
during a fiscal year and completed or are still attending as of September 30 of the following fiscal year. The
following table sets forth our consolidated student retention/completion rate during each of the periods indicated:
Year Ended September 30,
2016
2015
2014
Consolidated student retention/completion
66%
65%
65%
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 commitments and other liquidity requirements associated with
our existing operations as well as the expansion of programs at existing campuses through the next 12 months.
We believe that the strategic use of our cash resources includes funding our new campus as well as
subsidizing funding alternatives for our students. Additionally, we evaluate the repurchase of our common stock,
consideration of strategic acquisitions, expansion of programs at existing campuses, opening additional campus
locations and other potential uses of cash. On October 5, 2015, December 18, 2015 and March 31, 2016, we paid
cash dividends of $0.02 per share to common stockholders of record as of September 28, 2015, December 4, 2015
and March 21, 2016, respectively. The aggregate payment was approximately $1.5 million. On June 9, 2016, our
85
Board of Directors voted to eliminate the quarterly 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 are intended to be used to fund strategic long-term growth initiatives, including the expansion to new
markets of campuses on a scale similar to our Long Beach, California and Dallas/Ft. Worth, Texas campuses and
the creation of new programs in existing markets with under-utilized campus facilities. We may use the proceeds
to fund strategic acquisitions that complement our core business. To the extent that potential acquisitions are large
enough to require financing beyond cash from operations, cash and cash equivalents and investments on hand 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. The annual cash dividend that we anticipate paying
on the Series A Preferred Stock is approximately $5.3 million per year. Additionally, to the extent that we enter
into leasing transactions that result in financing obligations or capital leases, our interest expense would increase.
Our aggregate cash and cash equivalents and current investments were $120.7 million and $57.5 million as of
September 30, 2016 and 2015, respectively.
Our principal source of liquidity is operating cash flows and existing cash, cash equivalent and investment
balances. 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 thirty-week periods. DL subsidized and unsubsidized 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 sixteenth week from the start of the student’s academic year. Effective October
10, 2016, we began disbursing funds under the HCM1 method. To date we have not experienced and do not
anticipate an adverse effect on Title IV cash flows. 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.
Operating Activities
Our net cash provided by operating activities was $7.4 million, $8.2 million, and $27.1 million for the
years ended September 30, 2016, 2015 and 2014, respectively. The cash provided by operating activities in 2016
was primarily attributable to net loss of $47.7 million, adjustments of $51.5 million for non-cash and other items,
and $3.6 million related to the change in our operating assets and liabilities.
Changes in operating assets and liabilities
For the year ended September 30, 2016, the changes in our operating assets and liabilities resulted in cash
inflows of $3.6 million. The inflows were primarily attributable to changes in receivables and accounts payable
and accrued expenses. The decrease in receivables resulted in a cash inflow of $8.2 million, and was primarily
attributable to the timing of cash receipts on behalf of our students, and a decrease in our allowance for doubtful
accounts. The increase in accounts payable and accrued expenses resulted in a cash inflow of $1.9 million was
primarily due to the timing of invoices. Partially offsetting the increases was a change in income tax from a payable
position to a receivable position, which resulted in a cash outflow of $3.4 million and was primarily due to loss
carrybacks and the timing of tax payments and receipts.
For the year ended September 30, 2015, the changes in our operating assets and liabilities resulted in cash
outflows of $14.8 million. The outflows were primarily attributable to changes in receivables, income tax payable
and deferred revenue. The increase in receivables resulted in a cash outflow of $11.4 million and was primarily
attributable to the timing of cash receipts on behalf of our students and a decrease in our allowance for doubtful
accounts. The decrease in income tax payable resulted in a cash outflow of $3.1 million and was primarily due to
the timing of tax payments. The decrease in deferred revenue resulted in a cash outflow of $1.7 million and was
primarily attributable to the timing of student starts, the lower number of students in school and where they were
86
at period end in relation to the completion of their program at September 30, 2015 compared to September 30,
2014. Partially offsetting the cash outflows for the year ended September 30, 2015 was a cash inflow of $4.4 million
resulting from increases in accounts payable and accrued expenses and accrued tool sets and other current liabilities.
The increase in accounts payable and accrued expenses was primarily due to the opening of our Long Beach,
California campus in 2015, and the increase in accrued tool sets and other current liabilities was attributed to the
dividend payable at September 30, 2015.
For the year ended September 30, 2014, the changes in our operating assets and liabilities resulted in cash
outflows of $2.3 million. The outflows were primarily attributable to changes in income tax payable, receivables,
accounts payable and accrued expenses and deferred rent. The increase in income tax payable resulted in a cash
inflow of $4.1 million and was primarily due to the timing of tax payments. The increase in receivables, net resulted
in a cash outflow of $2.7 million and was primarily attributable to the timing of cash receipts on behalf of our
students in conjunction with the establishment of a receivable for reimbursable construction expenses incurred for
our Orlando, Florida campus expansion. The decrease in accounts payable and accrued expenses resulted in a
cash outflow of $1.9 million and was due primarily to the timing of payments in combination with a decrease in
accrued legal expense following the settlement of litigation during the year ended September 30, 2013. The decrease
in deferred rent liability resulted in a cash outflow of $1.6 million and was due to amortization of the deferred rent
balance related to tenant incentives associated with our home office lease.
Investing Activities
For the year ended September 30, 2016, cash provided by investing activities was $17.3 million. We had
cash inflows of $27.7 million of proceeds received upon the maturity of our investments. We had cash outflows
of $7.5 million related to the purchases of new and replacement training equipment for our ongoing operations.
We had a cash outflow of $1.5 million related to the acquisition of BMS and a cash outflow of $1.0 million related
to an investment in Pro-Mech.
For the year ending September 30, 2017, we anticipate investing in capital expenditures in the range of $12.5
million to $13.5 million primarily related to the expansion of programs at existing campuses.
For the year ended September 30, 2015, cash used in investing activities was $2.7 million and was primarily
related to $29.0 million in purchases of property and equipment and $26.1 million for the purchase of investments.
Approximately $9.7 million of the purchase of property and equipment was related to the purchase of the majority
of the buildings and land for our Houston, Texas campus facility and $12.5 million was related to the construction
of our new Long Beach, California campus. The remainder was related to the purchases of new and replacement
training equipment for our ongoing operations. The cash outflows were partially offset by approximately $51.8
million of proceeds received upon the maturity of our investments.
For the year ended September 30, 2014, cash used in investing activities was $9.2 million and was primarily
related to $12.0 million in purchases of property and equipment and approximately $61.7 million for the purchase
of investments. Approximately $5.5 million of the purchase of property and equipment was invested in the
integration of our Automotive Technology and Diesel Technology II program curricula at our Sacramento,
California and Orlando, Florida campuses as well as the expansion of the diesel program at our Orlando, Florida
campus. The cash outflows were partially offset by approximately $63.9 million of proceeds received upon the
maturity of our investments.
Financing Activities
For the year ended September 30, 2016, cash provided by financing activities was $64.9 million and was
primarily attributable to the net cash proceeds of $68.9 million for the issuance of preferred stock. We paid common
stock cash dividends in October 2015, December 2015 and March 2016 of $0.02 per share, totaling $1.5 million.
87
In June 2016, our Board of Directors voted to eliminate the quarterly cash dividend on our common stock. We
paid $1.4 million for preferred stock cash dividends in September 2016.
For the year ended September 30, 2015, cash used in financing activities was $15.1 million and was primarily
attributable to the payment of cash dividends in December 2014, March 2015 and June 2015 of $0.10 per share
totaling $7.3 million and the repurchase of $6.6 million of our common stock.
For the year ended September 30, 2014, cash used in financing activities was $13.5 million and was primarily
attributable to the payment of quarterly cash dividends of $0.10 per share totaling $9.9 million, the payment of
payroll taxes on stock-based compensation through shares withheld of $1.6 million, and the repurchase of $1.4
million of our common stock.
Share Repurchase Program
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. 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 the share repurchase program at any time without prior
notice. During the year ended September 30, 2016, we did not repurchase any shares. As of September 30, 2016,
we have repurchased 1,677,570 shares at an average price per share of $9.09 and a total cost of approximately
$15.3 million under this program. Under the terms of the Purchase Agreement, stock purchases under this program
require the approval of a majority of the voting power of the Series A Preferred Stock.
Contractual Obligations
The following table sets forth, as of September 30, 2016, the aggregate amounts of our significant
contractual obligations and commitments with definitive payment terms that will require cash outlays in the future.
Payments Due by Period
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
(In thousands)
Operating leases, net of
sublease income (1)
Purchase obligations (2)
Other long-term obligations (3)
Total contractual commitments
$
155,306
$
27,657
$
54,331
$
42,343
$
32,674
83,467
271,447
$
$
18,087
5,076
50,820
$
5,426
9,748
69,505
$
3,439
10,121
55,903
$
30,975
5,722
58,522
95,219
(1) Minimum rental commitments. These amounts do not include property taxes, insurance or normal recurring
repairs and maintenance.
(2) Includes all agreements to purchase goods or services of either a fixed or minimum quantity that are enforceable
and legally binding. Additionally, purchase orders outstanding as of September 30, 2016, employment
contracts and minimum payments under licensing and royalty agreements are included.
(3) Includes lease payments for our Lisle, Illinois and Long Beach, California campuses which are accounted for
as financing obligations. See Note 9 of the notes to our Consolidated Financial Statements within Part II, Item
8 of this Report on Form 10-K for further discussion.
88
Off-Balance Sheet Arrangements
Each of our campuses must be authorized by the applicable state education agency in which the campus
is located to operate and to grant degrees or diplomas to its students. Our campuses are subject to extensive,
ongoing regulation by each of these states. Additionally, our campuses are required to be authorized by the
applicable state education agencies of certain other states in which our campuses recruit students. Our insurers
issue surety bonds for us on behalf of our campuses and admissions representatives with multiple states to maintain
authorization to conduct our business. We are obligated to reimburse our insurers for any surety bonds that are
paid by the insurers. As of September 30, 2016, the total face amount of these surety bonds was approximately
$19.6 million. We are in the process of renegotiating the bonds required to operate and anticipate collateralizing
approximately $11.5 million in bonds, which will be reflected in other assets on our consolidated balance sheets.
Additionally, our consolidated balance sheets do not reflect our operating lease obligations described
above in "Contractual Obligations" or our proprietary loan program described below in "Critical Accounting
Estimates".
Related Party Transactions
Information concerning certain related party transactions is included in Note 14 of the notes to our
Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-K.
For a description of additional information regarding related party transactions, see the information
included in our proxy statement for the 2017 Annual Meeting of Stockholders under the heading “Certain
Relationships and Related Transactions”.
Seasonality
Our revenues and 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. Such patterns may change, however, as a result of new school openings, new program
introductions, increased enrollments of adult students or acquisitions. Furthermore, our revenues for the first
quarter ending December 31 are impacted by the closure of our campuses for a week in December for a holiday
break and during which we do not earn revenue.
Operating income is negatively impacted during the initial start up of new campus openings. We incur
marketing and admissions costs as well as campus personnel costs in advance of the campus opening. Typically
we begin to incur such costs approximately 12 to 15 months in advance of the campus opening with the majority
of the costs being incurred in the nine month period prior to a campus opening.
89
Revenues
Year Ended September 30,
2016
2015
2014
Three Month Period Ending:
Amount
Percent
Amount
Percent
Amount
Percent
December 31
March 31
June 30
September 30
($'s in thousands)
$
89,773
25.9% $
95,680
26.3% $
97,040
88,192
82,266
86,915
25.4%
23.7%
25.0%
91,235
85,106
90,653
25.2%
23.5%
25.0%
94,711
91,329
95,313
$ 347,146
100% $ 362,674
100% $ 378,393
25.6%
25.1%
24.1%
25.2%
100%
Income (Loss) from Operations
2016
Year Ended September 30,
2015
2014
Three Month Period Ending:
Amount
Percent
Amount
Percent
Amount
Percent
December 31
March 31
June 30
September 30
$ (2,193)
11.8% $
5,600
(60.7)% $
($'s in thousands)
(5,770)
(5,450)
(5,210)
$ (18,623)
31.0%
2,402
(3,996)
29.2%
28.0% (13,229)
100% $ (9,223)
(26.0)%
43.3 %
143.4 %
3,058
(1,612)
1,011
3,880
48.3 %
(25.5)%
16.0 %
61.2 %
100 %
100 % $
6,337
The decline in revenues for each of the three month periods ended March 31, June 30 and September 30,
2016; March 31, June 30, September 30 and December 31, 2015; and December 31, 2014, as compared to the
same periods in the prior year, was primarily due to a decrease in our student population in 2016 and 2015,
respectively. The decrease in our student population also contributed to a decline in income (loss) from operations
for the three month periods ended March 31 and June 30, 2016; June 30, September 30 and December 31, 2015
as compared to the same periods in the prior year.
For the three month periods ended December 31, 2014, March 31, 2015 and September 30, 2016, income
from operations increased as compared to the same periods in the prior year. The increases for the three months
ended December 31, 2014 and March 31, 2015 were primarily attributable to cost control efforts as well as a
decrease in our depreciation expense. The increase for the three months ended September 30, 2016 was primarily
attributable to the goodwill impairment recorded during the prior year comparable period.
Critical Accounting Estimates
Our discussion of our financial condition and results of operations is based upon our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States, or
GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to
revenue recognition, our proprietary loan program, allowance for uncollectible accounts, goodwill recoverability,
self-insurance claim liabilities, income taxes and contingencies. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the circumstances. The results of our
analysis form the basis for making judgments about the carrying values of assets and liabilities that are not readily
90
apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions, and the impact of such differences may be material to our consolidated financial statements.
Our significant accounting policies are discussed in Note 2 of the notes to our Consolidated Financial
Statements within Part II, Item 8 of this Report on Form 10-K. We believe that the following accounting estimates
are the most critical to aid in fully understanding and evaluating our reported financial results, and they require
management’s most subjective and complex judgments in estimating the effect of inherent uncertainties.
Revenue recognition. Revenues consist primarily of student tuition and fees derived from the programs
we provide after reductions are made for discounts and scholarships we sponsor, refunds for students who withdraw
from our programs prior to specified dates and the portion of tuition students have funded through our proprietary
loan program for which payment has not been received. Tuition and fee revenue is recognized ratably over the
term of the course or program offered. Approximately 98% of our revenues for each of the years ended September
30, 2016, 2015 and 2014 consisted of tuition. Our undergraduate programs are typically designed to be completed
in 45 to 102 weeks and our advanced training programs range from 11 to 23 weeks in duration. We supplement
our revenues with sales of textbooks and program supplies and other revenues. Sales of textbooks and program
supplies and other revenue are each recognized as sales occur or services are performed. 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 consolidated balance sheets because it is expected to be earned within the next 12 months.
Proprietary Loan Program. In order to provide funding for students who are not able to fully finance
the cost of their education under traditional governmental financial aid programs, veterans benefits, commercial
loan programs or other alternative sources, we established a private loan program with a bank. Under terms of the
related agreement, the bank originates loans for our students who meet our specific credit criteria with the related
proceeds used exclusively to fund a portion of their tuition. We then purchase all such loans from the bank at least
monthly and assume all of the related credit risk. The loans bear interest at market rates; however, principal and
interest payments are not required until six months after the student completes or withdraws from his or her program.
After the deferral period, monthly principal and interest payments are required over the related term of the loan.
In substance, we provide the students who participate in this program with extended payment terms for
a portion of their tuition and as a result, we account for the underlying transactions in accordance with our tuition
revenue recognition policy. However, due to the nature of the program coupled with the extended payment terms
required under the student loan agreements, collectability is not reasonably assured. Accordingly, we recognize
tuition and loan origination fees financed by the loan and any related interest income required under the loan when
such amounts are collected. All related expenses incurred with the bank or other service providers are expensed
as incurred. Since loan collectability is not reasonably assured, the loans and related deferred tuition revenue are
not recognized in our consolidated balance sheets.
Allowance for uncollectible accounts. We maintain an allowance for uncollectible accounts for estimated
losses resulting from the inability, failure or refusal of our students to make required payments. We offer a variety
of payment plans to help students pay that portion of their education expenses not covered by financial aid programs
or alternate fund sources, which are unsecured and not guaranteed.
We use estimates that are subjective and require judgment in determining the allowance for doubtful
accounts, which are principally based on accounts receivable, historical percentages of uncollectible accounts,
customer credit worthiness and changes in payment history when evaluating the adequacy of the allowance for
uncollectible accounts. We also monitor and consider external factors such as changes in the economic and
regulatory environment. We use an internal group of collectors, augmented by third party collectors as deemed
appropriate, in our collection efforts. When a student with Title IV loans withdraws, Title IV rules determine if we
are required to return a portion of Title IV funds to the lender. We are then entitled to collect these funds from the
students, but collection rates for these types of receivables is significantly lower than our collection rates for
receivables for students who remain in our programs.
91
Although we believe that our allowance is adequate, if we underestimate the allowances required,
additional allowances may be necessary, which would result in increased selling, general and administrative
expenses in the period such determination is made.
Goodwill. 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
might result from the deterioration in the operating performance of the acquired business, adverse market conditions,
adverse changes in the 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.
Our goodwill resulted primarily from the acquisition of our motorcycle and marine education business
in 1998. We recorded an impairment charge of $12.4 million related to the goodwill allocated to our MMI Phoenix,
Arizona campus during the year ended September 30, 2015. The remaining $8.2 million of goodwill from this
acquisition is allocated to our MMI Orlando, Florida campus that provides the related educational programs.
Additionally, we recorded $0.8 million of goodwill related to the acquisition of BrokenMyth Studios, LLC in
February 2016. Our total recorded goodwill was $9.0 million as of September 30, 2016. We perform our annual
goodwill impairment assessment during the fourth quarter of each fiscal year. In performing our impairment tests,
we first consider the option to assess qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit or intangible, as applicable, is less than its carrying amount. If we conclude that it is more
likely than not that the fair value is less than the carrying amount based on our qualitative assessment, or that a
qualitative assessment should not be performed, we proceed with the quantitative impairment tests to compare the
estimated fair value of the reporting unit to the carrying value of its net assets.
The process of evaluating goodwill and indefinite-lived intangibles for impairment is subjective and
requires significant judgment at many points during the analysis. If we elect to perform an optional qualitative
analysis, we consider many factors including, but not limited to, general economic conditions, industry and market
conditions, our market capitalization, financial performance and key business drivers, long-term operating plans
and potential changes to significant assumptions used in the most recent fair value analysis for the reporting unit.
When performing a quantitative goodwill impairment test, we generally determine the fair value of
reporting units using an income-based approach consisting of a discounted cash flow valuation method. The fair
value determination consists primarily of using unobservable inputs under the fair value measurement standards,
and we believe our related assumptions are consistent with a reasonable market participant view while employing
the concept of highest and best use of the asset.
We believe the most critical assumptions and estimates in determining the estimated fair value of our
reporting units include, but are not limited to, future tuition revenues, operating costs, working capital changes,
capital expenditures and a discount rate. The assumptions used in determining our expected future cash flows
consider various factors such as historical operating trends particularly in student enrollment and pricing and long-
term operating strategies and initiatives.
2016 Impairment Testing
We completed our 2016 annual goodwill impairment tests and determined that there was no impairment
related to our MMI Orlando, Florida campus. We performed a quantitative goodwill impairment test using the fair
value method described above. For the goodwill associated with our newly-acquired BMS reporting unit, we
performed a qualitative goodwill impairment analysis and determined it was more likely than not that the fair value
of this reporting unit exceeded its carrying value. Our analysis included consideration of macro-economic and
company-specific factors as well as the synergies we are beginning to realize as we integrate this reporting unit
into our business. Actual experience may differ from the amounts included in our assessment, which could result
in additional impairment of our goodwill in the future.
92
Self-Insurance. We are self-insured for a number of risks including claims related to employee health
care and dental care and workers’ compensation. The accounting for our self-insured plans involves estimates and
judgments to determine our ultimate liability related to reported claims and claims incurred but not reported. We
consider our historical experience, severity factors, actuarial analysis and existing stop loss insurance in estimating
our ultimate insurance liability. If our insurance claim trends were to differ significantly from our historic claim
experience, we would make a corresponding adjustment to our insurance reserves.
Income taxes. We are subject to the income tax laws of the United States, which are complex and subject
to different interpretations by the taxpayer and the relevant governmental taxing authorities. As a result, significant
judgments and interpretations are required in determining our provision for income taxes.
Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets,
which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax
purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing
the need for a valuation allowance, we consider all available evidence, including our historical profitability and
projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the
deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained
on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The
weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be
objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances
should be recorded against deferred tax assets. Changes in the valuation allowance are included in our statement
of operations as a charge or credit to income tax expense.
As a result of our assessment, income tax expense within our statements of income (loss) was impacted
by an increase of $34.2 million in the valuation allowance during the year ended September 30, 2016. The amount
of the deferred tax assets considered realizable, however, could be adjusted in future periods if estimates of future
taxable income during the carryforward period are increased, if objective negative evidence in the form of
cumulative losses is no longer present and if additional weight may be given to subjective evidence such as our
projections for growth. We 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.
Although we believe that our estimates are reasonable, changes in tax laws or our interpretation of tax
laws, and the outcome of future tax audits could significantly impact the amounts provided for income taxes in
our consolidated financial statements. Additionally, actual operating results and the underlying amount and category
of income in future years could render our current assessment of recoverable deferred tax assets inaccurate.
Contingencies. In the ordinary conduct of our business, we are subject to occasional lawsuits,
investigations and claims, including, but not limited to, claims involving students and graduates and routine
employment matters. 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 record
a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we
disclose the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount
involved is material. Generally, we expense legal fees as incurred. There can be no assurance that the ultimate
outcome of any of the lawsuits, investigations or claims pending against us will not have a material adverse effect
on our financial condition or results of operations.
93
Recent Accounting Pronouncements
Information concerning recently issued accounting pronouncements which are not yet effective is included
in Note 3 of the notes to our Consolidated Financial Statements within Part II, Item 8 of this Report on Form 10-
K. As indicated in Note 3, we are still evaluating the impact of the recently issued accounting pronouncements on
our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposure to market risk relates to changes in interest rates. We invest our cash and cash
equivalents in mutual funds that invest in U.S. treasury notes, U.S. treasury bills and repurchase agreements
collateralized by U.S. treasury notes, U.S. treasury bills and pre-funded municipal bonds collateralized by escrowed-
to-maturity U.S. treasury notes. As of September 30, 2016, we held $119.0 million in cash and cash equivalents
and $1.7 million in investments. For the year ended September 30, 2016, we earned interest income of $0.2 million.
We do not believe that reasonably possible changes in interest rates will have a material effect on our financial
position, results of operations or cash flows.
As of September 30, 2016, we did not have short-term or long-term borrowings.
Effect of Inflation
To date, inflation has not had a significant effect on our operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and its subsidiaries are included below on pages F-2 to
F-50 of this report:
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2016 and 2015
Consolidated Statements of Income (Loss) for the years ended September 30, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2016,
2015 and 2014
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the years ended September 30, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
Number
F- 2
F- 3
F- 6
F- 7
F- 8
F- 9
F- 10
F- 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
94
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chairman of the Board,
Chief Executive Officer and President 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) as of September 30, 2016, pursuant to Exchange Act Rule 13a-15. Based upon
that evaluation, the Chairman of the Board, Chief Executive Officer and President and the Chief Financial Officer
concluded that our disclosure controls and procedures as of September 30, 2016 were effective in ensuring that (i)
information required to be disclosed by the Company in the reports that it files or submits 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 the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management, including its 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 quarter ended September
30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting and our Independent Registered
Public Accounting Firm’s report with respect to the effectiveness of our internal control over financial reporting
are included on pages F-2 and F-3, respectively, of this Report on Form 10-K.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Chairman of the Board, Chief Executive Officer and President 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.
Management’s Certifications
The Company has filed as exhibits to its Annual Report on Form 10-K for the year ended September 30,
2016, filed with the SEC, the certifications of the Chairman of the Board, Chief Executive Officer and President
and the Chief Financial Officer of the Company required by Section 302 of the Sarbanes-Oxley Act of 2002.
95
The Company has submitted to the NYSE the most recent Annual Chief Executive Officer Certification
as required by Section 303A.12(a) of the NYSE Listed Company Manual.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information set forth in our proxy statement for the 2017 Annual Meeting of Stockholders under the
headings “Election of Directors”; “Corporate Governance and Related Matters”; “Code of Conduct”; “Corporate
Governance Guidelines” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein
by reference. Information regarding executive officers of the Company is set forth under the caption “Executive
Officers of Universal Technical Institute, Inc.” in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in our proxy statement for the 2017 Annual Meeting of Stockholders under the
heading “Executive Compensation”, “Compensation Committee Interlocks” and “Compensation Committee
Report” is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth in our proxy statement for the 2017 Annual Meeting of Stockholders under the
headings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and
Management” is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information set forth in our proxy statement for the 2017 Annual Meeting of Stockholders under the
heading “Certain Relationships and Related Transactions” and “Corporate Governance and Related Matters” is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in our proxy statement for the 2017 Annual Meeting of Stockholders under the
heading “Fees Paid to Independent Registered Public Accounting Firm” and “Audit Committee Pre-Approval
Procedures for Services Provided by the Independent Registered Public Accounting Firm” is incorporated herein
by reference.
96
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
Documents filed as part of this Annual Report on Form 10-K:
(1)
(2)
The financial statements required to be included in this Annual Report on Form 10-K
are included in Item 8 of this Report.
All other schedules have been omitted because they are not required, are not
applicable, or the required information is shown on the financial statements or the
notes thereto.
(3)
Exhibits:
Exhibit
Number
3.1
4.1
3.4
4.2
3.3
3.2
Description
Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to
Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated December 23, 2004.)
Amended and Restated Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2
to the Form 8-K filed by the Registrant on June 30, 2016.)
Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant on June
24, 2016.)
Certificate of Designation, Preferences and Rights of Series E Junior Participating Preferred
Stock. (Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by the Registrant
on June 30, 2016.)
Specimen Certificate evidencing shares of common stock. (Incorporated by reference to
Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 dated October 3, 2003,
or an amendment thereto (No. 333-109430).)
Registration Rights Agreement, dated December 16, 2003, between the Registrant and
certain stockholders signatory thereto. (Incorporated by reference to Exhibit 4.2 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment
thereto (No. 333-109430).)
Registration Rights Agreement dated June 24, 2016 by and between the Registrant and
Coliseum Holdings I, LLC. (Incorporated by reference to Exhibit 4.1 to the Form 8-K filed
by the Registrant on June 24, 2016.)
Rights Agreement, dated as of June 29, 2016, by and between the Registrant and
Computershare Inc., as Rights Agent. (Incorporated by reference to Exhibit 4.1 to the Form
8-K filed by the Registrant on June 30, 2016.)
Universal Technical Institute Executive Benefit Plan, effective March 1, 1997.
(Incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on
Form S-1 dated October 3, 2003, or an amendment thereto (No. 333-109430).)
10.2* Management 2002 Option Program. (Incorporated by reference to Exhibit 10.5 to the
Registrant’s Registration Statement on Form S-1 dated October 3, 2003, or an amendment
thereto (No. 333-109430).)
10.1*
4.3
4.4
97
Exhibit
Number
10.3*
Description
Universal Technical Institute, Inc. 2003 Incentive Compensation Plan (as amended January
6, 2012). (Formerly known as the 2003 Stock Incentive Plan). (Incorporated by reference
to Exhibit 10.1 to the Form 8-K filed by the Registrant on February 23, 2012.)
10.4.1* Form of Restricted Stock Award Agreement. (Incorporated by reference to Exhibit 10.1 to
the Form 8-K filed by the Registrant on June 21, 2006.)
10.4.2* Form of Stock Option Grant Agreement. (Incorporated by reference to Exhibit 10.2 to the
Form 8-K filed by the Registrant on June 21, 2006.)
10.4.3* Form of Performance Shares Award Agreement. (Incorporated by reference to Exhibit
10.5.4 to the Registrant’s Annual Report on Form 10-K filed December 1, 2009.)
10.4.4* Form of Restricted Stock Unit Agreement. (Incorporated by reference to Exhibit 10.1 to
the Form 8-K filed by the Registrant on September 11, 2013.)
10.4.5* Form of Restricted Stock Unit Agreement. (Incorporated by reference to Exhibit 10.1 to
10.5
10.6
10.7*
10.8*
10.9*
10.10*
the Form 8-K filed by the Registrant on September 10, 2014.)
Lease Agreement, dated July 2, 2001, as amended February 27, 2015, between Delegates
LLC, as landlord, and The Clinton Harley Corporation, as tenant. (Incorporated by reference
to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 dated October 3,
2003, or an amendment thereto (No. 333-109430), and Exhibit 10.1 to the Form 10-Q filed
by the Registrant on May 1, 2015.)
Form of Indemnification Agreement by and between the Registrant and its directors and
officers. (Incorporated by reference to Exhibit 10.7 to the Form 8-K filed by the Registrant
on August 6, 2014.)
Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 to the Form 8-K
filed by the Registrant on April 6, 2010.)
Employment Agreement, dated April 8, 2014, between the Registrant and Kimberly J.
McWaters. (Incorporated by reference to Exhibit 10.1 to a Form 8-K filed by the Registrant
on April 11, 2014.)
Employment Agreement, dated April 8, 2014, between the Registrant and Eugene S.
Putnam, Jr. (Incorporated by reference to Exhibit 10.2 to a Form 8-K filed by the Registrant
on April 11, 2014.)
Severance & Transition Agreement, dated as of September 30, 2013, between the
Registrant and John C. White. (Incorporated by reference to Exhibit 10.1 to the Form 8-
K filed by the Registrant on October 4, 2013.)
10.11.1* Offer Letter, dated as of August 2, 2012, between the Registrant and Sherrell E. Smith.
(Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on
August 21, 2012.)
10.11.2* Addendum Letter, dated as of August 7, 2012, between the Registrant and Sherrell E.
10.13*
Smith. (Incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the
Registrant on August 21, 2012.)
Form of Retention/Recognition Bonus Agreement. (Incorporated by reference to Exhibit
10.1 to the Form 8-K filed by the Registrant on June 13, 2011.)
10.14* Universal Technical Institute, Inc. Severance Plan, as amended December 2014,
(Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the Registrant on
December 12, 2014.)
98
10.15
21.1
23.1
23.2
24.1
31.1
31.2
32.1
32.2
101
Securities Purchase Agreement dated June 24, 2016, between the Registrant and Coliseum
Holdings I, LLC. (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the
Registrant on June 24, 2016.)
Subsidiaries of the Registrant. (Filed herewith.)
Consent of Deloitte & Touche LLP. (Filed herewith.)
Consent of PricewaterhouseCoopers LLP. (Filed herewith.)
Power of Attorney. (Included on signature page.)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. (Filed herewith.)
Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
The following financial information from our Annual Report on Form 10-K for the year
ended September 30, 2016, formatted in Extensible Business Reporting Language (XBRL):
(i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated
Statements of Shareholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v)
Notes to Consolidated Financial Statements.
*Indicates a contract with management or compensatory plan or arrangement.
99
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.
Date: November 30, 2016
UNIVERSAL TECHNICAL INSTITUTE, INC.
By: /s/ Kimberly J. McWaters
Kimberly J. McWaters
Chairman of the Board, Chief Executive Officer
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kimberly J. McWaters and Bryce H. Peterson, or either of them, as his true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K and any documents related to this report and filed pursuant to the Securities Exchange
Act of 1934, and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and necessary to be done
in connection therewith as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
100
SIGNATURE
/s/ Kimberly J. McWaters
Kimberly J. McWaters
TITLE
Chairman of the Board, Chief
Executive Officer (Principal Executive
Officer) and President
DATE
November 30, 2016
/s/ Bryce H. Peterson
Bryce H. Peterson
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
November 30, 2016
/s/ Conrad A. Conrad
Conrad A. Conrad
/s/ David A. Blaszkiewicz
David A. Blaszkiewicz
/s/ Alan E. Cabito
Alan E. Cabito
/s/ William J. Lennox, Jr.
William J. Lennox, Jr.
/s/ Dr. Roderick Paige
Dr. Roderick Paige
/s/ Roger S. Penske
Roger S. Penske
/s/ Christopher S. Shackelton
Christopher S. Shackelton
/s/ Linda J. Srere
Linda J. Srere
/s/ Kenneth R. Trammell
Kenneth R. Trammell
/s/ John C. White
John C. White
Lead Director
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
November 30, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
101
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2016 and 2015
Consolidated Statements of Income (Loss) for the years ended September 30, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2016,
2015 and 2014
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2016, 2015 and
2014
Consolidated Statements of Cash Flows for the years ended September 30, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Page
Number
F- 2
F- 3
F- 6
F- 7
F- 8
F- 9
F- 10
F- 12
F- 1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting for the company and for assessing the effectiveness of internal control over financial reporting as such
term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Internal control over
financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States.
Internal control over financial reporting includes policies and procedures that pertain to maintaining records
that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of the company’s assets;
providing reasonable assurance that transactions are recorded as necessary to permit preparation of our financial
statements in accordance with accounting principles generally accepted in the United States; providing reasonable
assurance that receipts and expenditures of company assets are made in accordance with management and director
authorization; and providing reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of company assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risks that controls
may become inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework established in “Internal Control — Integrated Framework (2013)” issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that
the Company’s internal control over financial reporting was effective as of September 30, 2016. There were no
changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have
materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2016 has
been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report
which appears herein.
F- 2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Universal Technical Institute, Inc.
Scottsdale, Arizona
We have audited the internal control over financial reporting of Universal Technical Institute, Inc. and
subsidiaries (the "Company") as of September 30, 2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion
on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision
of, the company's principal executive and principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of September 30, 2016, based on the criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended September 30, 2016 of
the Company and our report dated November 30, 2016 expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 30, 2016
F- 3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Universal Technical Institute, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Universal Technical Institute, Inc. and
subsidiaries (the “Company”) as of September 30, 2016 and 2015 and the related consolidated statements of income
(loss), comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of September 30, 2016 and 2015, and the results of their operations
and their cash flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company's internal control over financial reporting as of September 30, 2016, based
on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 30, 2016 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 30, 2016
F- 4
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Universal Technical Institute, Inc.
In our opinion, the consolidated statements of income (loss), of comprehensive income (loss), of
shareholders’ equity and of cash flows for the year ended September 30, 2014 present fairly, in all material respects,
the results of operations and cash flows of Universal Technical Institute, Inc. and its subsidiaries (the “Company”)
for the year ended September 30, 2014, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
December 3, 2014
F- 5
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Restricted cash
Investments, current portion
Receivables, net
Deferred tax assets, net
Prepaid expenses and other current assets
Total current assets
Investments, less current portion
Property and equipment, net
Goodwill
Deferred tax assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Dividends payable
Deferred revenue
Accrued tool sets
Financing obligation, current
Income tax payable
Other current liabilities
Total current liabilities
Deferred tax liabilities, net
Deferred rent liability
Financing obligation
Other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
Common stock, $0.0001 par value, 100,000,000 shares authorized,
31,489,331 shares issued and 24,624,434 shares outstanding as of
September 30, 2016 and 31,098,193 shares issued and 24,233,296
shares outstanding as of September 30, 2015
Preferred stock, $0.0001 par value, 10,000,000 shares authorized;
700,000 shares of Series A Convertible Preferred Stock issued and
outstanding as of September 30, 2016, liquidation preference of $100
per share, and 0 shares issued and outstanding as of September 30, 2015
Paid-in capital - common
Paid-in capital - preferred
Treasury stock, at cost, 6,864,897 shares as of September 30, 2016 and
September 30, 2015
Retained earnings (deficit)
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
September 30, 2016
September 30, 2015
(In thousands)
$
$
$
$
$
$
$
119,045
5,956
1,691
15,253
—
20,004
161,949
—
114,033
9,005
—
12,172
297,159
42,545
—
44,491
2,938
913
—
3,673
94,560
3,141
8,987
43,141
10,716
160,545
29,438
5,824
28,086
22,409
4,539
17,761
108,057
1,719
124,144
8,222
20,248
11,912
274,302
42,620
485
44,693
3,624
737
1,187
3,148
96,494
—
10,822
44,053
9,458
160,827
3
3
—
182,615
68,820
(97,388)
(17,454)
18
136,614
297,159
$
—
178,202
—
(97,388)
32,638
20
113,475
274,302
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Revenues
Operating expenses:
Educational services and facilities
Selling, general and administrative
Goodwill impairment
Total operating expenses
Income (loss) from operations
Other (expense) income:
Interest income
Interest expense
Equity in earnings of unconsolidated affiliate
Other income (expense)
Total other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Income (loss) available for distribution
Earnings (loss) per share:
Net income (loss) per share - basic
Net income (loss) per share - diluted
Weighted average number of shares outstanding:
Basic
Diluted
Cash dividends declared per common share
Year Ended September 30,
2016
2014
2015
(In thousands, except per share amounts)
$
347,146
$
362,674
$
378,393
194,395
171,374
—
365,769
(18,623)
243
(3,439)
342
(49)
(2,903)
(21,526)
26,170
(47,696) $
1,424
(49,120) $
194,416
165,124
12,357
371,897
(9,223)
215
(2,340)
527
140
(1,458)
(10,681)
(1,532)
(9,149) $
—
(9,149) $
(2.02) $
(2.02) $
(0.38) $
(0.38) $
24,313
24,313
24,391
24,391
0.04
$
0.32
$
200,054
172,002
—
372,056
6,337
223
(1,847)
471
563
(590)
5,747
3,710
2,037
—
2,037
0.08
0.08
24,640
24,920
0.40
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)
Other comprehensive income (loss) (net of tax):
Year Ended September 30,
2016
2015
2014
(In thousands)
$
(47,696) $
(9,149) $
2,037
Equity interest in investee's unrealized gains (losses) on
hedging derivatives, net of taxes(1)
(2)
Comprehensive income (loss)
(1)The tax effect during the years ended September 30, 2016 and 2015 was not significant.
(47,698) $
$
20
(9,129) $
—
2,037
The accompanying notes are an integral part of these consolidated financial statements.
F- 8
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9
-
F
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss)
$
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
2016
Year Ended September 30,
2015
(In thousands)
2014
(47,696) $
(9,149) $
2,037
Depreciation and amortization
Amortization of assets subject to financing obligation
Amortization of held-to-maturity investments
Goodwill impairment
Impairment of investment in unconsolidated affiliate
Bad debt expense
Stock-based compensation
Excess tax benefit from stock-based compensation
Deferred income taxes
Equity in earnings of unconsolidated affiliates
Training equipment credits earned, net
Other (gains) and losses, net
Changes in assets and liabilities:
Restricted cash: Title IV credit balances
Receivables
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Deferred revenue
Income tax payable/receivable
Accrued tool sets and other current liabilities
Deferred rent liability
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from disposal of property and equipment
Purchase of investments
Proceeds received upon maturity of investments
Acquisitions
Investment in joint venture
Capitalized costs for intangible assets
Return of capital contribution from unconsolidated affiliate
Restricted cash: proprietary loan program
Net cash provided by (used in) investing activities
Cash flows from financing activities:
15,067
2,682
405
—
815
1,153
4,904
—
27,928
(342)
(1,176)
24
165
8,202
(2,009)
(127)
1,855
(202)
(3,394)
489
(1,835)
476
7,384
(7,495)
22
—
27,709
(1,500)
(1,000)
(575)
475
(289)
17,347
Proceeds from sale of preferred stock, net of issuance costs paid
Payment of preferred stock dividend
Payment of common stock dividends
Repayment of financing obligation
Payment of payroll taxes on stock-based compensation through shares withheld
Excess tax benefit from stock-based compensation
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
68,886
(1,424)
(1,457)
(736)
(393)
—
—
64,876
89,607
29,438
119,045
$
$
F- 10
17,294
1,861
1,627
12,357
—
1,589
4,265
—
(5,394)
(527)
(899)
24
60
(11,443)
(1,065)
(677)
2,705
(1,672)
(3,149)
1,678
(753)
(490)
8,242
(29,030)
3
(26,061)
51,792
—
—
(453)
464
607
(2,678)
—
—
(7,310)
(663)
(519)
—
(6,619)
(15,111)
(9,547)
38,985
29,438
$
18,923
1,551
2,393
—
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3,972
5,721
(85)
(4,050)
(471)
(1,002)
402
230
(2,701)
(767)
(514)
(1,859)
(660)
4,053
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(1,610)
963
27,056
(12,024)
42
(61,729)
63,892
—
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568
49
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—
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(9,875)
(613)
(1,639)
85
(1,423)
(13,465)
4,389
34,596
38,985
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
2016
Year Ended September 30,
2015
(In thousands)
2014
Supplemental disclosure of cash flow information:
Taxes paid
Interest paid
Training equipment obtained in exchange for services
Depreciation of training equipment obtained in exchange for services
Change in accrued capital expenditures during the period
Construction period construction liability - construction in progress
Construction period financing obligation - building
Construction liability recognized as financing obligation
Stock based compensation classified as liability instruments
Vesting of stock based compensation liability
$
$
$
$
$
$
$
$
$
$
1,636
3,439
2,738
1,342
1,792
$
$
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$
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$
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$
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$
2,340
$
969
$
1,168
435
$
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(4,825) $
$
12,316
— $
$
80
3,771
1,967
2,473
1,215
820
7,120
4,825
33,500
—
152
The accompanying notes are an integral part of these consolidated financial statements.
F- 11
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
1. Business Description
Universal Technical Institute, Inc. (“UTI” or, collectively, “we”, "us" and “our”) provides postsecondary
education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine
technicians. We offer undergraduate degree or diploma programs at 12 campuses and advanced training programs
that are sponsored by the manufacturer or dealer at certain campuses and dedicated training centers. We work
closely with leading original equipment manufacturers in the automotive, diesel, motorcycle and marine industries
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 well as various veterans benefits programs. For further discussion, see Concentration
of Risk under Note 2 and Note 19 “Governmental Regulation and Financial Aid”.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of UTI and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States requires management to make certain estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue
recognition, our proprietary loan program, allowance for uncollectible accounts, investments, property and
equipment, goodwill recoverability, self-insurance claim liabilities, income taxes, contingencies and stock-based
compensation. We base our estimates on historical experience and on various other assumptions that we believe
are reasonable under the circumstances. The results of our analysis form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions, and the impact of such differences may be material
to our consolidated financial statements.
Revenue Recognition
Revenues consist primarily of student tuition and fees derived from the programs we provide after reductions
are made for discounts and scholarships we sponsor, refunds for students who withdraw from our programs prior
to specified dates and the portion of tuition students have funded through our proprietary loan program for which
payment has not been received. Tuition and fee revenue is recognized ratably over the term of the course or program
offered. Approximately 98% of our revenues for each of the years ended September 30, 2016, 2015 and 2014
consisted of tuition. The majority of our undergraduate programs are designed to be completed in 45 to 102 weeks
and our advanced training programs range from 11 to 23 weeks in duration. We supplement our revenues with
sales of textbooks and program supplies and other revenues, which are recognized as sales occur or services are
performed. 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 consolidated balance sheets because it is expected to
be earned within the next 12 months.
F- 12
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Proprietary Loan Program
In order to provide funding for students who are not able to fully finance the cost of their education under
traditional governmental financial aid programs, commercial loan programs or other alternative sources, we
established a private loan program with a bank.
Under terms of the proprietary loan program, the bank originates loans for our students who meet our
specific credit criteria with the related proceeds used exclusively to fund a portion of their tuition. We then purchase
all such loans from the bank at least monthly and assume all of the related credit risk. The loans bear interest at
market rates; however, principal and interest payments are not required until six months after the student completes
or withdraws from his or her program. After the deferral period, monthly principal and interest payments are
required over the related term of the loan.
The bank provides these services in exchange for a fee at a percentage of the principal balance of each
loan and related fees. Under the terms of the related agreement, we transfer funds for loan purchases to a deposit
account with the bank in advance of the bank funding the loan, which secures our related loan purchase obligation.
Such funds are classified as restricted cash in our consolidated balance sheet.
In substance, we provide the students who participate in this program with extended payment terms for a
portion of their tuition and as a result, we account for the underlying transactions in accordance with our tuition
revenue recognition policy. However, due to the nature of the program coupled with the extended payment terms
required under the student loan agreements, collectability is not reasonably assured. Accordingly, we recognize
tuition and loan origination fees financed by the loan and any related interest income required under the loan when
such amounts are collected. All related expenses incurred with the bank or other service providers are expensed
as incurred within educational services and facilities expense and were approximately $1.5 million, $1.4 million
and $1.5 million for the years ended September 30, 2016, 2015 and 2014, respectively. Since loan collectability
is not reasonably assured, the loans and related deferred tuition revenue are not recognized in our consolidated
balance sheets.
The following table summarizes the impact of the proprietary loan program on our tuition revenue and interest
income during each period in our consolidated statements of income (loss) as well as on a cumulative basis at the
end of the current period. Tuition revenue and interest income excluded represents amounts which would have
been recognized during the period had collectability of the related amounts been assured. Amounts collected and
recognized represent actual cash receipts during the period.
Year Ended September 30,
2015
2014
2016
Inception
to date
Tuition and interest income excluded
Amounts collected and recognized
Net amount excluded during the period
$
$
22,622
(7,166)
15,456
$
$
24,192
(5,440)
18,752
$
$
26,042
(3,457)
22,585
$
$
142,715
(21,085)
121,630
As of September 30, 2016, we had committed to provide loans to our students for approximately $144.0
million since inception.
F- 13
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
The following table summarizes the activity related to the balances outstanding under our proprietary loan
program, including loans outstanding, interest and origination fees, which are not recognized in our consolidated
balance sheets. Amounts written off represent amounts which have been turned over to third party collectors; such
amounts are not included within bad debt expense in our consolidated statements of income (loss).
Balance at beginning of period
Loans extended
Interest accrued
Amounts collected and recognized
Amounts written off
Balance at end of period
Restricted Cash
Year Ended September 30,
2016
2015
74,664
19,341
3,888
(7,166)
(15,216)
75,511
$
$
70,759
18,740
3,108
(5,440)
(12,503)
74,664
$
$
Restricted cash primarily represents the funds transferred in advance of loan purchases under our proprietary
loan program. Restricted cash also includes funds held for students from Title IV financial aid program funds that
result in credit balances on a student’s account. Changes in restricted cash that represent funds held for students
as described above are included in cash flows from operating activities on our consolidated statements of cash
flows because these restricted funds are related to the core activity of our operations.
Allowance for Uncollectible Accounts
We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability, failure
or refusal of our students to make required payments. We offer a variety of payment plans to help students pay
that portion of their education expenses not covered by financial aid programs or alternate fund sources, which
are unsecured and not guaranteed. Management analyzes accounts receivable, historical percentages of
uncollectible accounts, customer credit worthiness and changes in payment history when evaluating the adequacy
of the allowance for uncollectible accounts. We use an internal group of collectors, augmented by third party
collectors as deemed appropriate, in our collection efforts. Although we believe that our allowance is adequate, if
the financial condition of our students deteriorates, resulting in an impairment of their ability to make payments,
or if we underestimate the allowances required, additional allowances may be necessary, which would result in
increased selling, general and administrative expenses in the period such determination is made.
Investments
We invest in pre-funded municipal bonds which are generally secured by escrowed-to-maturity U.S. Treasury
notes. Municipal bonds represent debt obligations issued by states, cities, counties and other governmental entities,
which earn interest that is exempt from federal income taxes. Additionally, we invest in certificates of deposit
issued by financial institutions and 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 our investments until maturity and
therefore classify these investments as held-to-maturity and report them at amortized cost. Investments with an
original maturity date of 90 days or less at the time of purchase are classified as cash equivalents and investments
with a maturity date greater than one year at the end of the period are classified as non-current.
We review our held-to-maturity investments for impairment quarterly to determine if other-than-temporary
declines in the carrying value have occurred for any individual investment. Other-than-temporary declines in the
F- 14
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
value of our held-to-maturity investments are recorded as expense in the period in which the determination is made.
We determined that no other-than-temporary declines occurred in our held-to-maturity investments during the
years ended September 30, 2016 and 2015.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization expense are calculated using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold improvements is calculated using the straight-
line method over the remaining useful life of the asset or term of lease, whichever is shorter. Costs relating to
software developed for internal use and curriculum development are capitalized and amortized using the straight-
line method over the related estimated useful lives. Such costs include direct costs of materials and services as
well as payroll and related costs for employees who are directly associated with the projects. Maintenance and
repairs are expensed as incurred.
We review the carrying value of our property and equipment for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. We evaluate our long-lived
assets for impairment by examining estimated future cash flows. These cash flows are evaluated by using probability
weighting techniques as well as comparisons of past performance against projections. Assets may also be evaluated
by identifying independent market values. If we determine that an asset’s carrying value is impaired, we will write-
down the carrying value of the asset to its estimated fair value and charge the impairment as an operating expense
in the period in which the determination is made. There were no impairment charges required for the years ended
September 30, 2016, 2015 or 2014.
Goodwill
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 of the acquired business, adverse market conditions, adverse changes
in the 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.
Our goodwill resulted primarily from the acquisition of our motorcycle and marine education business
in 1998. We recorded an impairment charge of $12.4 million related to the goodwill allocated to our MMI Phoenix,
Arizona campus during the year ended September 30, 2015. The remaining $8.2 million of goodwill from this
acquisition is allocated to our MMI Orlando, Florida campus that provides the related educational programs.
Additionally, we recorded $0.8 million of goodwill related to the acquisition of BrokenMyth Studios, LLC in
February 2016. Our total recorded goodwill was $9.0 million as of September 30, 2016. We assess our goodwill
for impairment during the fourth quarter of each fiscal year.
The change in the carrying value of goodwill is as follows:
Balance as of September 30, 2015
Acquisition of BMS
Balance as of September 30, 2016
$
$
8,222
783
9,005
During the year ended September 30, 2016, we utilized a discounted cash flow model that incorporated
estimated future cash flows for the next five years and an associated terminal value to determine the fair value of
our MMI Orlando, Florida campus. Key management assumptions included in the cash flow model included future
F- 15
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
tuition revenues, operating costs, working capital changes, capital expenditures and a discount rate. Based upon
our annual assessments, we determined that our goodwill was not impaired as of September 30, 2016 and that
impairment charges were not required. For the goodwill associated with our newly-acquired BMS reporting unit,
we performed a qualitative goodwill impairment analysis and determined it was more likely than not that the fair
value of this reporting unit exceeded its carrying value. Our analysis included consideration of macro-economic
and company-specific factors as well as the synergies we are beginning to realize as we integrate this reporting
unit into our business. Actual experience will differ from the amounts included in our assessment, which could
result in impairment of our goodwill in the future.
Self-Insurance Plans
We are self-insured for claims related to employee health and dental care and claims related to workers’
compensation. Liabilities associated with these plans are estimated by management with consideration of our
historical loss experience, severity factors and independent actuarial analysis. Our claim liabilities are based on
estimates, and while we believe the amounts accrued are adequate, the ultimate losses may differ from the amounts
provided. Our recorded net liability related to self-insurance plans was $3.5 million as of September 30, 2016.
Deferred Rent Liability
We lease the majority of our administrative and educational facilities under operating lease agreements.
Some lease agreements contain tenant improvement allowances, free rent periods or rent escalation clauses. In
instances where one or more of these items are included in a lease agreement, we record a deferred rent liability
on the consolidated balance sheet and record rent expense evenly over the term of the lease.
Advertising Costs
Costs related to advertising are expensed as incurred and totaled approximately $41.2 million, $44.7 million
and $39.2 million for the years ended September 30, 2016, 2015 and 2014, respectively.
Stock-Based Compensation
Historically, we have issued restricted stock awards and restricted stock units with vesting subject to service
conditions and stock options. We measure all share-based payments to employees at estimated fair value. We
recognize the compensation expense for restricted stock awards and restricted stock units with only service
conditions on a straight-line basis over the requisite service period. We did not grant stock options during the years
ended September 30, 2016, 2015 and 2014. Shares issued under our equity compensation plans are new shares.
Compensation expense associated with restricted stock awards and restricted stock units is measured based
on the grant date fair value of our common stock, discounted for non-participation in anticipated dividends during
the vesting period. The requisite service period for restricted stock awards and restricted stock units is generally
the vesting period. Compensation expense is recognized only for those awards that are expected to vest, which we
estimate based upon historical forfeitures.
Stock-based compensation expense of $4.9 million, $4.3 million and $5.7 million (pre-tax) was recorded for
the years ended September 30, 2016, 2015 and 2014, respectively. The tax benefit related to stock-based
compensation recognized was $1.9 million, $1.6 million and $2.3 million for the years ended September 30, 2016,
2015 and 2014, respectively.
F- 16
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Income Taxes
We recognize deferred tax assets and liabilities for the estimated future tax consequences of events attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. We also recognize deferred tax assets for net operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected
to be recovered or settled. Deferred tax assets are reduced through a valuation allowance if it is more likely than
not that the deferred tax assets will not be realized.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash
and cash equivalents, restricted cash, investments and receivables. As of September 30, 2016, we held cash and
cash equivalents of $119.0 million, restricted cash of $6.0 million and investments of $1.7 million invested in pre-
funded municipal bonds, collateralized by escrowed-to-maturity U.S. treasury notes, certificates of deposit issued
by financial institutions and corporate bonds.
We place our cash and cash equivalents and restricted cash with high quality financial institutions and limit
the amount of credit exposure with any one financial institution. We mitigate the concentration risk of our
investments by limiting the amount invested in any one issuer. We mitigate the risk associated with our investment
in corporate bonds by requiring a minimum credit rating of A.
We extend credit for tuition and fees, for a limited period of time, to a majority of our students. A substantial
portion is repaid through the student’s participation in federally funded financial aid programs. Transfers of funds
from the financial aid programs to us are made in accordance with the U.S. Department of Education (ED)
requirements. Approximately 66% of our revenues, on a cash basis, were collected from funds distributed under
Title IV Programs for the year ended September 30, 2016. This percentage differs from our Title IV percentage as
calculated under the 90/10 rule due to the prescribed treatment of certain Title IV stipends under the rule.
Additionally, approximately 19% of our revenues, on a cash basis, were collected from funds distributed under
various veterans benefits programs for the year ended September 30, 2016.
The financial aid and veterans benefits programs are subject to political and budgetary considerations. There
is no assurance that such funding will be maintained at current levels. Extensive and complex regulations govern
the financial assistance programs in which our students participate. Our administration of these programs is
periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for the initiation
of potential adverse actions, including a suspension, limitation, placement on reimbursement status or termination
proceeding, which could have a material adverse effect on our business. ED and other regulators have increased
the frequency and severity of their enforcement actions against postsecondary schools which have resulted in the
imposition of material liabilities, sanctions, letter of credit requirements and other restrictions and, in some cases,
resulted in the loss of schools’ eligibility to receive Title IV funds or in closure of the schools.
If any of our institutions were to lose its eligibility to participate in federal student financial aid programs,
the students at that institution would lose access to funds derived from those programs and would have to seek
alternative sources of funds to pay their tuition and fees. Students obtain access to federal student financial aid
through an ED prescribed application and eligibility certification process. Student financial aid funds are generally
made available to students at prescribed intervals throughout their predetermined expected length of study. Students
typically apply the funds received from the federal financial aid programs to pay their tuition and fees. The transfer
of funds is from the financial aid program to the student, who then uses those funds to pay for a portion of the cost
of their education. The receipt of financial aid funds reduces the student’s amounts due to us and has no impact
F- 17
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
on revenue recognition, as the transfer relates to the source of funding for the costs of education, which may occur
either through Title IV or other funds and resources available to the student.
Fair Value of Financial Instruments
The carrying value of cash equivalents, restricted cash, accounts receivable, accounts payable, accrued
liabilities and deferred tuition approximates their respective fair value as of September 30, 2016 and 2015 due to
the short-term nature of these instruments.
Comprehensive Income
During the year ended September 30, 2012, we invested $4.0 million to acquire an equity interest in a joint
venture (JV) related to the lease of our Lisle, Illinois campus facility. Currently, the JV uses an interest rate cap to
manage interest rate risk associated with its floating rate debt. This derivative instrument is designated as a cash
flow hedge based on the nature of the risk being hedged. As such, the effective portion of the gain or loss on the
derivative is initially reported as a component of the JV’s accumulated other comprehensive income or loss, net
of tax, and is subsequently reclassified into earnings when the hedged transaction affects earnings. Any ineffective
portion of the gain or loss is recognized in the JV’s current earnings. Due to our equity method investment in the
JV, when the JV reports a current year component of other comprehensive income (OCI), we, as an investor,
likewise adjust our investment account for the change in investee equity. In addition, we adjust our OCI for our
share of the JV’s currently reported OCI item. For each of the years ended September 30, 2016 and 2015, our
share of the JV’s OCI was less than $0.1 million.
Start-up Costs
Costs related to the start-up of new campuses are expensed as incurred.
3. Recent Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board (FASB) issued guidance which clarifies how
certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new
standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,
and early adoption is permitted. We are currently evaluating the impact that the standard will have on our
consolidated statements of cash flows. Further, in November 2016, the FASB issued guidance that requires restricted
cash and cash equivalents to be included with cash and cash equivalents on the statement cash flows. The new
standard is expected to be effective for fiscal years, and interim periods within those years, beginning after December
15, 2017, with early adoption permitted. Based on the restricted cash balances on our consolidated balance sheets,
we expect this standard to have an impact on the presentation of our consolidated statements of cash flows.
In June 2016, the FASB issued guidance which changes the methodology for measuring credit losses on
financial instruments and the timing of when such losses are recorded. The guidance is effective for fiscal years,
including interim periods within those years, beginning after December 15, 2019, with early adoption permitted.
We are currently evaluating the impact that the standard will have on our results of operations, financial condition
and financial statement disclosures.
In March 2016, the FASB issued guidance intended to simplify several areas of accounting for share-
based compensation arrangements, including the income tax impact, classification on the statement of cash flows
and forfeitures. The guidance is effective for annual periods, including interim periods within those periods,
beginning after December 15, 2016, with early adoption permitted. We intend to adopt this guidance for our fiscal
year ending September 30, 2017. We do not anticipate that the update will have a material impact on our results
of operations, financial condition or financial statement disclosures.
F- 18
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
In February 2016, the FASB issued guidance requiring lessees to recognize a right-of-use asset and a lease
liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be
classified as either financing or operating, with classification affecting the pattern of expense recognition in the
statement of income. The guidance is effective for annual periods, including interim periods within those periods,
beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that the
update will have on our results of operations, financial condition and financial statement disclosures.
In January 2016, the FASB issued guidance related to the classification and measurement of financial
instruments. The guidance primarily impacts the accounting for equity investments other than those accounted for
using the equity method of accounting, financial liabilities under the fair value option and the presentation and
disclosure requirements for financial instruments. Additionally, the FASB clarified guidance related to the valuation
allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale
debt securities. The accounting for other financial instruments, such as loans, investments in debt securities and
financial liabilities is largely unchanged. The guidance is effective for annual periods, including interim periods
within those periods, beginning after December 15, 2017 with early adoption permitted. We are currently evaluating
the adoption methods and the impact that the update will have on our results of operations, financial condition and
financial statement disclosures.
In November 2015, the FASB issued guidance which simplifies the balance sheet classification of deferred
taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance,
be classified as noncurrent on the balance sheet. This guidance is effective for public business entities for annual
periods, and for interim periods within those periods, beginning after December 15, 2016, with early adoption
permitted. We intend to adopt this guidance for our fiscal year ending September 30, 2017. We do not anticipate
that it will have a material impact on our balance sheet classification, results of operations, financial condition or
financial statement disclosures.
In April 2015, the FASB issued guidance related to customers accounting for fees paid in a cloud computing
arrangement. The guidance provides clarification on whether a cloud computing arrangement includes a software
license. If an arrangement includes a software license, then the software license element is accounted for consistent
with the acquisition of other such licenses. If the arrangement does not include a software license, the arrangement
is accounted for as a service contract. Entities have the option of adopting the guidance retrospectively or
prospectively. The guidance is effective for annual periods, including interim periods within those periods,
beginning after December 15, 2015, with early adoption permitted. We intend to adopt the guidance prospectively
and do not anticipate that the guidance will have a material impact on our results of operations, financial condition
or financial statement disclosures.
In February 2015, the FASB issued guidance which changes the analysis that a reporting entity must
perform to determine whether it should consolidate certain types of legal entities. Specifically, the amendments
(1) modify the evaluation of whether limited partnerships with similar legal entities are variable interest entities
(VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited
partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those
that have fee arrangements and related party relationships and (4) provide a scope exception from consolidation
guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance
with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered
money market funds. Entities have the option of using a full or modified retrospective approach to adopt the
guidance. This guidance is effective for public business entities for fiscal years, and for interim periods within
those fiscal years, beginning after December 15, 2015, with early adoption permitted. We do not anticipate it will
have a material impact on our results of operations, financial condition or financial statement disclosures.
F- 19
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
In May 2014, the FASB issued guidance which outlines a single comprehensive revenue model for entities
to use in accounting for revenue arising from contracts with customers. The guidance supersedes most current
revenue recognition guidance, including industry-specific guidance, and requires a company to recognize revenue
to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to
receive in exchange for those goods or services. Entities have the option of using either a full retrospective or
modified approach to adopt the guidance. In June 2015, the FASB deferred the effective date of the guidance by
one year. This guidance is now effective for annual and interim reporting periods beginning after December 15,
2017, and early adoption is now permitted for annual and interim reporting periods beginning after December 15,
2016. In 2016, the FASB issued further guidance that offers narrow scope improvements and clarifies certain
implementation issues related to revenue recognition, including principal versus agent considerations, the
identification of performance obligations and licensing. These additional updates have the same effective date as
the new revenue guidance. We are currently evaluating the adoption methods and the impact that the update will
have on our results of operations, financial condition and financial statement disclosures.
4. Postemployment Benefits
In September 2016, we completed a reduction in workforce and provided postemployment benefits
totaling approximately $3.9 million to approximately 70 impacted employees. Additionally, we periodically enter
into agreements which provide postemployment benefits to personnel whose employment is terminated. The
postemployment benefit liability, which is included in accounts payable and accrued expenses on the accompanying
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 November 2018.
The postemployment benefit accrual activity for the year ended September 30, 2016 was as follows:
Liability Balance
at
September 30,
2015
Postemployment
Benefit Charges
Cash Paid
Other
Non-cash (1)
Liability Balance
at
September 30,
2016
Severance
Other
Total
$
$
545
—
545
$
$
5,015
285
5,300
$
$
(1,334) $
(81)
(1,415) $
(180) $
(15)
(195) $
4,046
189
4,235
(1) Primarily relates to the expiration of benefits not used within the time offered under the separation
agreement and non-cash severance.
5. Receivables, net
Receivables, net consist of the following:
Tuition receivables
Tax receivables
Other receivables
Receivables
Less allowance for uncollectible accounts
September 30,
2016
2015
$
$
10,664
2,207
3,333
16,204
(951)
15,253
$
$
18,517
—
5,712
24,229
(1,820)
22,409
F- 20
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
The allowance for uncollectible accounts is estimated using our historical write-off experience applied to
the receivable balances for students who are no longer attending school due to graduation or withdrawal or who
are in school and have receivable balances in excess of financial aid available to them. We write off receivable
balances against the allowance for uncollectible accounts at the time we transfer the balance to a third party
collection agency.
The following table summarizes the activity for our allowance for uncollectible accounts for the year ended
September 30:
2016
2015
2014
Balance at
Beginning of
Period
Additions to
Bad Debt
Expense
Write-offs of
Uncollectible
Accounts
Balance at
End of
Period
$
$
$
1,820
3,794
4,149
$
$
$
1,153
2,634
3,972
$
$
$
(2,022) $
(4,608) $
(4,327) $
951
1,820
3,794
During the year ended September 30, 2015, we reversed, and recorded as a reduction to bad debt expense,
approximately $1.0 million of bad debt expense recorded in 2011 and 2012 for processing issues related to student
funds received from a non-Title IV federal funding agency. Based on communication with the agency, we determined
it was no longer probable that we will be required to return such funds. This amount is presented within write-offs
of uncollectible accounts in the table above.
6. Investments
We invest in pre-funded municipal bonds which are generally secured by escrowed-to-maturity U.S.
Treasury notes. Municipal bonds represent debt obligations issued by states, cities, counties and other governmental
entities, which earn interest that is exempt from federal income taxes. Additionally, we invest in certificates of
deposit issued by financial institutions and 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 our investments until
maturity and therefore classify these investments as held-to-maturity and report them at amortized cost.
Amortized cost and fair value for investments classified as held-to-maturity at September 30, 2016 were
as follows:
Due in less than 1 year:
Municipal bonds
Corporate bonds
Certificates of deposit
Amortized
Cost
Gross Unrealized
Gains
Losses
Estimated
Fair Market
Value
$
$
744
200
747
1,691
$
$
— $
—
—
— $
— $
—
—
— $
744
200
747
1,691
F- 21
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Amortized cost and fair value for investments classified as held-to-maturity at September 30, 2015 were
as follows:
Due in less than 1 year:
Municipal bonds
Corporate bonds
Certificates of deposit
Due in 1 - 2 years:
Municipal bonds
Corporate bonds
Certificates of deposit
Amortized
Cost
Gross Unrealized
Gains
Losses
$
$
13,117
11,402
3,567
771
201
747
29,805
$
$
14
1
—
2
—
—
17
$
$
Estimated
Fair Market
Value
(1) $
(10)
—
—
—
—
(11) $
13,130
11,393
3,567
773
201
747
29,811
Investments are exposed to various risks, including interest rate, market and credit risk and 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 consolidated balance sheets and consolidated statements of income.
7. 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 and 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
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
September 30,
2016
Money market funds
Corporate bonds
Commercial paper
Municipal bonds
Certificates of deposit
Total assets at fair value on a recurring
basis
$
$
108,963
200
2,501
744
747
$
108,963
200
—
—
—
— $
—
2,501
744
747
$
113,155
$
109,163
$
3,992
$
—
—
—
—
—
—
F- 22
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Fair Value Measurements Using
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
September 30,
2015
Money market funds
Corporate bonds
Municipal bonds
Certificates of deposit
Total assets at fair value on a recurring
basis
$
$
$
24,369
11,594
13,903
4,314
$
24,369
11,594
—
—
— $
—
13,903
4,314
54,180
$
35,963
$
18,217
$
—
—
—
—
—
Our Level 2 investments are valued using readily available pricing sources which utilize market observable
inputs, including the current interest rate for similar types of instruments.
8. Property and Equipment, net
Property and equipment, net consisted of the following:
Land
Building and building improvements
Leasehold improvements
Training equipment
Office and computer equipment
Curriculum development
Software developed for internal use
Vehicles
Construction in progress
Less accumulated depreciation and amortization
Depreciable
Lives (in years)
—
30-35
1-28
3-10
3-10
5
3-5
5
—
$
$
September 30,
2016
September 30,
2015
3,189
78,870
39,539
92,601
37,688
18,702
11,905
1,228
2,195
285,917
(171,884)
114,033
$
$
3,189
79,555
39,326
87,795
38,776
18,716
11,859
1,233
3,941
284,390
(160,246)
124,144
Depreciation expense related to our property and equipment was $17.3 million, $16.5 million and $17.7
million for the years ended September 30, 2016, 2015 and 2014, respectively. Amortization expense related to
curriculum development and software developed for internal use was $1.1 million, $3.6 million and $4.0 million
for the years ended September 30, 2016, 2015 and 2014, respectively.
F- 23
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
The following amounts, which are included in the above table, represent assets financed by financing
obligations:
September 30,
2016
September 30,
2015
Buildings and building improvements
Construction in progress
Assets financed by financing obligations, gross
Less accumulated depreciation and amortization
Assets financed by financing obligation, net
$
$
45,816
$
—
45,816
(6,162)
39,654
$
45,816
—
45,816
(3,480)
42,336
9. Build-to-Suit Lease
We entered into build-to-suit facility lease agreements related to the design and construction of our Long
Beach, California campus and the relocation of our Glendale Heights, Illinois campus to, and the design and
construction of a new campus in, Lisle, Illinois. Under each agreement, we determined that we have continued
involvement in the related facility after the construction period was completed. Therefore, the arrangements are
accounted for as financing obligations. Accordingly, the asset and a corresponding financing obligation are included
in our consolidated balance sheet. The asset will be depreciated over the initial lease term of 15 years for our Long
Beach, California campus, and over the initial lease term of 18 years for our Lisle, Illinois campus. The financing
obligation is amortized through the effective interest method in which a portion of the lease payments is recognized
as interest expense, a portion is allocated to the imputed land lease and the remaining portion decreases the financing
obligation.
Additionally, for each campus, we have an imputed operating lease related to our use of the land which is
recognized from the time we entered into the agreement through the initial lease term. Construction for our Long
Beach, California campus was completed during August 2015 and the facility was placed into service effective
September 1, 2015. Construction for our Lisle, Illinois campus was completed during November 2013 and the
facility was placed into service effective December 1, 2013.
Future minimum lease payments under the Lisle, Illinois and Long Beach, California leases as of September
30, 2016 are as follows:
Years ending September 30,
2017
2018
2019
2020
2021
Thereafter
Total future minimum lease obligation
Less imputed interest on financing obligation
Less imputed accrued land lease obligation
Net present value of financing obligation
F- 24
$
$
$
4,402
4,522
4,646
4,772
4,902
55,001
78,245
(33,542)
(649)
44,054
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
10. Investment in Unconsolidated Affiliates
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 and is included
in other assets in our consolidated balance sheet. We recognize our proportionate share of the JV’s net income or
loss during each accounting period as a change in our investment.
Currently, the JV uses an interest rate cap to manage interest rate risk associated with its floating rate
debt. This derivative instrument is designated as a cash flow hedge based on the nature of the risk being hedged.
As such, the effective portion of the gain or loss on the derivative is initially reported as a component of the JV’s
accumulated other comprehensive income or loss, net of tax, and is subsequently reclassified into earnings when
the hedged transaction affects earnings. Any ineffective portion of the gain or loss is recognized in the JV’s current
earnings. Due to our equity method investment in the JV, when the JV reports a current year component of other
comprehensive income (OCI), we, as an investor, likewise adjust our investment account for the change in investee
equity. In addition, we adjust our OCI for our share of the JV’s currently reported OCI item.
Additionally, in February 2016, we made an investment in and entered into a licensing agreement with Pro-
MECH Learning Systems, LLC (Pro-MECH), a company that provides comprehensive technician development
programs and shop operations services. This investment, which included $0.7 million in cash as well as the
conversion of a $0.3 million note receivable extended during the first quarter of 2016, resulted in our ownership
of 25% of the outstanding equity interests of Pro-MECH. The $1.0 million investment was accounted for under
the equity method of accounting. During the three months ended September 30, 2016, we determined that our
investment was impaired and recorded an other-than-temporary impairment charge of $0.8 million, which was
included within other expense on our consolidated statements of income (loss).
Our equity in earnings of unconsolidated affiliates was $0.3 million and $0.5 million for the years ended
September 30, 2016 and September 30, 2015, respectively.
Investment in unconsolidated affiliates consists of the following:
September 30, 2016
September 30, 2015
Carrying Value
(In thousands)
Ownership
Percentage
Carrying Value
(In thousands)
Ownership
Percentage
Investment in JV
Investment in Pro-MECH
$
$
4,036
27.972% $
3,986
27.972%
—
25.000% $
—
—
F- 25
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Investment in unconsolidated affiliates included the following activity during the period:
Balance at beginning of period
Investment in unconsolidated affiliate
Equity in earnings of unconsolidated affiliates
Return of capital contribution from unconsolidated affiliates
Loss on impairment of investment in unconsolidated affiliates
Equity interest in investee's unrealized gains on hedging
derivatives, net of taxes
Balance at end of period
11. Acquisitions
Year ended September 30,
2016
2015
$
3,986
$
1,000
342
(475)
(815)
$
(2)
4,036
$
3,903
—
527
(464)
—
20
3,986
On February 9, 2016, we entered into an agreement to acquire substantially all of the assets of BrokenMyth
Studios, LLC (BMS), a New York-based full production studio that offers a variety of services, including system
architecture design, application and website development, interactive media development and digital technical
training for diesel, medical and industrial equipment companies.
The cash purchase price for this transaction was $1.5 million and the acquisition includes potential
contingent consideration payments in the future. The payment of the contingent consideration, which has a
maximum value of $0.9 million, is based upon BMS’s achievement of certain operating income metrics over the
three-year period following the date of acquisition. On the acquisition date, we estimated the fair value of the
contingent consideration to be $0.2 million using a discounted cash flow valuation method encompassing
unobservable inputs, including projected operating results for the performance period and the discount rate applied.
During the three months ended September 30, 2016, we recorded an immaterial adjustment to the estimated fair
value of the contingent consideration.
We incurred transaction costs of less than $0.1 million for this acquisition, which are included within
selling, general and administrative expenses on our consolidated statements of income (loss). We accounted for
the acquisition as a business combination and allocated the purchase price to the assets acquired at fair value as
summarized below:
BMS brand
Work in process
Customer relationships
Goodwill
Total assets acquired
Less: Fair value of contingent consideration
Cash paid for acquisition (purchase price)
F- 26
Purchase Price
Allocation
Useful Life (Years)
$
$
5
0.25
5
Indefinite
488
224
250
783
1,745
(245)
1,500
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
We determined the fair value of the assets acquired based on assumptions that reasonable market
participants would use while employing the concept of highest and best use of each respective item. No liabilities
were assumed in this transaction. The BMS brand intangible was valued using the relief-from-royalty method,
which represents the benefit of owning the intangible as opposed to paying royalties for its use. The remaining
intangibles were valued using income or replacement cost approaches. We determined that the acquired intangibles
are finite-lived and we are amortizing them on a straight-line basis that reflects the pattern in which we expect the
economic benefits of such assets to be consumed. Additionally, we recorded approximately $0.8 million in goodwill
as a result of this acquisition, which is expected to be deductible for tax purposes. The goodwill is primarily
attributable to future earnings potential and to other intangibles that do not qualify for separate recognition, such
as assembled workforce. We have included BMS in our Other reportable segment.
The operating results of BMS are included in our consolidated financial statements from the date of the
acquisition forward. We have not provided pro forma information or the revenue and operating results of the
acquired entity because its results of operations are not material to our consolidated results of operations.
12. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
Accounts payable
Accrued compensation and benefits
Other accrued expenses
13. Income Taxes
September 30,
2016
September 30,
2015
$
$
11,805
22,501
8,239
42,545
$
$
14,498
17,534
10,588
42,620
Each reporting period, we estimate the likelihood that we will be able to recover our deferred tax assets,
which represent timing differences in the recognition of revenue and certain tax deductions for accounting and tax
purposes. The realization of deferred tax assets is dependent, in part, upon future taxable income. In assessing the
need for a valuation allowance, we consider all available evidence, including our historical profitability and
projections of future taxable income. If, based on the weight of available evidence, it is more likely than not the
deferred tax assets will not be realized, we record a valuation allowance. Such valuation allowance is maintained
on our deferred tax assets until sufficient positive evidence exists to support its reversal in future periods. The
weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be
objectively verified. Significant judgment is required to determine if, and the extent to which, valuation allowances
should be recorded against deferred tax assets.
During the three months ended March 31, 2016, there were several pieces of negative evidence that
contributed to our conclusion that a valuation allowance was appropriate against all deferred tax assets that rely
upon future taxable income for their realization. This negative evidence included (1) a significant pre-tax loss
during the three months ended March 31, 2016, (2) deterioration in leading indicators, such as applications and
new student starts, and projected population during the three months ended March 31, 2016, which negatively
impacts projected future operating results, (3) financial projections that indicated we will be in a 3-year cumulative
loss position during 2016 and (4) the continued challenging business and regulatory environment facing for-profit
education institutions.
F- 27
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
As a result of our assessment, our income tax expense was impacted by $34.2 million related to the increase
in the valuation allowance within our consolidated statements of income (loss) during the year ended September
30, 2016. The amount of the deferred tax assets considered realizable, however, could be adjusted in future periods
if estimates of future taxable income during the carryforward period are increased, if objective negative evidence
in the form of cumulative losses is no longer present and if additional weight may be given to subjective evidence
such as our projections for growth. We 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.
Under Section 382 of the Internal Revenue Code, for income tax purposes only, we underwent an
ownership change as a result of the preferred stock issuance in June 2016. Accordingly, certain deductions and
losses will be subject to an annual Section 382 limitation for both federal and state tax purposes. The limitation
may affect the timing of when these deductions and losses can be used and, in turn, may impact the timing of the
payment of income taxes. The limitation may also cause such deductions and losses to expire unused.
The components of income tax expense (benefit) are as follows:
Current expense
United States federal
State
Total current expense (benefit)
Deferred (benefit) expense
United States federal
State
Total deferred (benefit) expense
Total provision for income taxes
Year Ended September 30,
2016
2015
2014
$
(2,043) $
285
(1,758)
24,877
3,051
27,928
$
26,170
$
2,819
$
1,043
3,862
(5,109)
(285)
(5,394)
(1,532) $
6,425
1,335
7,760
(3,923)
(127)
(4,050)
3,710
The income tax provision differs from the tax that would result from application of the statutory federal tax
rate of 35.0% to pre-tax income for the year. The reasons for the differences are as follows:
Year Ended September 30,
2016
2015
2014
Income tax expense at statutory rate
$
State income taxes, net of federal tax benefit
Deferred tax asset write-off related to share based
compensation
Increase in valuation allowance
Other, net
Total income tax expense
(7,534) $
(531)
51
34,184
—
$
26,170
$
(3,738) $
265
1,572
128
241
(1,532) $
2,012
648
828
49
173
3,710
Beginning in December 2013, certain stock-based compensation awards granted to employees expired,
which required a write-off of the related deferred tax asset through income tax expense as our pro forma windfall
pool of available excess tax benefits was no longer sufficient to absorb the shortfall. As a result of the full valuation
allowance recorded on our deferred tax assets during the three months ended March 31, 2016, any write-offs of
deferred tax assets related to stock-based compensation will have no impact on income tax expense. Subsequent
F- 28
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
to March 31, 2016, we wrote off $1.8 million of deferred tax assets related to stock-based compensation and reduced
the corresponding valuation allowance by the same amount.
The components of the deferred tax assets (liabilities) recorded in the accompanying consolidated balance
sheets were as follows:
Gross deferred tax assets:
Deferred compensation
Reserves and accruals
Accrued tool sets
Deferred revenue
Deferred rent liability
Net operating losses and tax credit carryforwards
Depreciation and amortization of property and equipment
Charitable contribution carryovers
Deductions limited by Section 382
Valuation allowance
Total gross deferred tax assets
Gross deferred tax liabilities:
Amortization of goodwill and intangibles
Depreciation and amortization of property and equipment
Prepaid and other expenses deductible for tax
Total deferred tax liabilities, gross
Net deferred tax assets (liabilities)
$
September 30,
2016
2015
$
2,083
$
5,417
1,188
22,326
1,213
479
684
671
592
(32,828)
1,825
(3,141)
—
(1,825)
(4,966)
(3,141) $
1,784
5,395
1,460
19,606
1,939
393
—
—
—
(401)
30,176
(3,140)
(421)
(1,828)
(5,389)
24,787
The following table summarizes the activity for the valuation allowance for the year ended September 30:
Balance at
Beginning of
Period
Additions
(Reductions)
to Income
Tax
Expense
Write-offs
Balance at
End of
Period
$
$
$
401
273
224
$
$
$
34,184
128
49
$
$
$
(1,757) $
— $
— $
32,828
401
273
2016
2015
2014
As of September 30, 2016, we had approximately $1.7 million in deferred tax assets related to charitable
contribution carryforwards, deductions limited by Section 382, as well as net operating loss and credit
carryforwards. These attributes will expire in the years 2017 through 2037.
We file income tax returns for federal purposes and in many states. Our tax filings remain subject to
examination by applicable tax authorities for a certain length of time, generally three to four years, following the
tax year to which these filings relate.
F- 29
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
14. Commitments and Contingencies
Operating Leases
We lease certain of our facilities and certain equipment under non-cancelable operating leases, some of which
contain renewal options, escalation clauses and requirements to pay other fees associated with the leases. We
recognize rent expense on a straight-line basis. Property at one of our campus locations is leased from a related
party. Future minimum rental commitments as of September 30, 2016 for all non-cancelable operating leases are
as follows:
Years ending September 30,
Gross
Sublease
income
Net
2017
2018
2019
2020
2021
Thereafter
$
27,982
27,818
27,173
22,660
19,840
30,975
(325) $
(328)
(332)
(157)
—
—
27,657
27,490
26,841
22,503
19,840
30,975
$
156,448 $
(1,142) $
155,306
Rent expense for operating leases was approximately $27.9 million, $28.0 million and $27.9 million for the
years ended September 30, 2016, 2015 and 2014, respectively.
Rent expense includes rent paid to related parties, which was approximately $2.0 million, $2.1 million and
$2.3 million for the years ended September 30, 2016, 2015 and 2014, respectively. Since 1991, certain of our
properties have been leased from entities controlled by John C. White, an independent Director on our Board of
Directors.
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.
Licensing Agreements
In 1999, we entered into a licensing agreement that gives us the right to use certain materials and trademarks
in the development of our courses. The agreement was amended in November 2009. Under the terms of the amended
agreement, we are required to pay a flat fee per student for each program a student completes. There are no minimum
license fees required to be paid. The agreement terminates upon the written notice of either party providing not
less than ninety days notification of intent to terminate. License fees related to this agreement were $0.9 million,
F- 30
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
$1.1 million and $1.0 million for the years ended September 30, 2016, 2015 and 2014, respectively, and were
recorded in educational services and facilities expenses.
In May 2007, we entered into a licensing agreement that gives us the right to use certain trademarks, trade
names, trade dress and other intellectual property in connection with the operation of our campuses and courses.
The agreement was amended January 2015 and expires December 31, 2024. We are committed to pay royalties
based upon minimum amounts specified in the agreement, throughout the term. The agreement required a minimum
royalty payment of $1.6 million in calendar year 2016. The minimum royalty payments increase approximately
$0.05 million every other calendar year thereafter. The expense related to these agreements was $1.7 million, $1.9
million and $1.8 million for the years ended September 30, 2016, 2015 and 2014, respectively, and was recorded
in educational services and facilities expenses.
In July 2013, we entered into a training and materials agreement that gives us the right to use certain
materials and trademarks in development of our courses. Under the terms of the agreement, we are required to pay
a flat fee per student for each related program a student completes. There is an immaterial minimum annual fee
required to be paid upon commencement of the program and annually thereafter. The agreement terminates upon
the written notice of either party providing not less than 90 days notification of intent to terminate. The expense
related to this agreement was $0.1 million for the year ended September 30, 2016 and less than $0.1 million for
the years ended September 30, 2015 and 2014, and was recorded in educational services and facilities expenses.
In April 2015, we entered into a licensing agreement that gives us the right to use certain trademarks in
connection with the operation of our campuses and courses. The agreement has an initial term of four years, with
options for three annual renewals totaling a seven year term. The maximum license fee over seven years is $2.3
million. The expense related to this agreement was $0.5 million and $0.2 million for the years ended September
30, 2016 and 2015, respectively, and was recorded in educational services and facilities expenses.
Vendor Relationships
We have an agreement with a vendor that allows us to purchase promotional tool kits for our students at a
discount from the vendor’s list price. In addition, we earn credits that are redeemable for equipment from the
vendor that we use in our business. Credits are earned on our purchases as well as purchases made by students
enrolled in our programs. We have agreed to grant the vendor exclusive access to our campuses, to display
advertising and to use their tools to train our students. Under the related agreement, which expires in April 2017,
we are required to maintain a minimum balance of $1.0 million in credits earned on student purchases. The credits
under this agreement may be redeemed in multiple ways, which historically has been for additional equipment at
the full retail list price, which is more than we would be required to pay using cash. Upon termination of the
agreement, we continue to earn credits relative to promotional tool kits we purchase or additional tools our active
students purchase. We continue to earn these credits until a tool kit is provided to the last student eligible under
the agreement. A net prepaid expense with the vendor resulted from an excess of credits earned over credits used
of $7.1 million and $6.4 million as of September 30, 2016 and 2015, respectively.
Students are provided a voucher which can be redeemed for a tool kit near graduation. The cost of the tool
kits, net of the credit, is accrued during the time period in which the students begin attending school until they
have progressed to the point that the promotional tool kit vouchers are provided. Our consolidated balance sheets
include an accrued tool set liability of $2.9 million and $3.6 million as of September 30, 2016 and 2015, respectively.
Additionally, our liability to the vendor for vouchers redeemed by students was $1.5 million and $1.2 million as
of September 30, 2016 and 2015, respectively, and is included in accounts payable and accrued expenses in our
consolidated balance sheets.
F- 31
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Executive Employment Agreements
We have employment agreements with key executives that provide for continued salary payments and benefits
if the executives are terminated for reasons other than cause or in the event of a change in control, as defined in
the agreements. The range of the aggregate commitment upon termination of employment under these agreements
and existing equity award agreements as of September 30, 2016 is approximately $1.6 million to $2.5 million.
This excludes amounts recorded on our consolidated balance sheet as of September 30, 2016 related to employees
impacted by the September 2016 reduction in workforce.
Change in Control Agreements
We have severance agreements with other executives that provide for continued salary payments if the
employees are terminated for any reason within twelve months subsequent to a change in control. Under the terms
of the agreements, these employees are entitled to between six and twelve months salary at their highest rate during
the previous twelve months. In addition, the employees are eligible to receive the unearned portion of their target
bonus in effect in the year termination occurs and would be eligible to receive medical benefits under the plans
maintained by us at no cost. The aggregate amount of our commitments under these agreements as of September
30, 2016 is approximately $9.5 million.
Deferred Compensation Plans
We have established a deferred compensation plan (the Plan) effective April 1, 2010, into which certain
members of management are eligible to defer a maximum of 75% of their regular compensation and a maximum
of 100% of their incentive compensation. Non-employee members of our Board of Directors are eligible to defer
up to 100% of their cash compensation. The amounts deferred by the participant under this Plan are credited with
earnings or losses based upon changes in values of participant elected notional investments. Each participant is
fully vested in the amounts deferred.
We may make contributions at the discretion of our Board of Directors that will generally vest according to
a five year vesting schedule. Distribution elections under the Plan may be for separation from service distribution
or in-service distribution. We are not obligated to fund the Plan; however, we have purchased life insurance policies
on the participants in order to fund the related benefits and such policies have been placed into a rabbi trust.
Our obligations under the Plan totaled $4.5 million and $4.5 million as of September 30, 2016 and 2015,
respectively, and are included in other liabilities while the cash surrender value of the life insurance policies totaled
$5.3 million and $5.0 million as of September 30, 2016 and 2015, respectively, and are included in other assets in
our consolidated balance sheets.
Surety Bonds
Each of our campuses must be authorized by the applicable state education agency in which the campus is
located to operate and to grant degrees, diplomas or certificates to its students. Our campuses are subject to extensive,
ongoing regulation by each of these states. Additionally, our campuses are required to be authorized by the applicable
state education agencies of certain other states in which our campuses recruit students. Our insurers issue surety
bonds for us on behalf of our campuses and admissions representatives with multiple states to maintain authorization
to conduct our business. We are obligated to reimburse our insurers for any surety bonds that are paid by the
insurers. As of September 30, 2016, the total face amount of these surety bonds was approximately $19.6 million.
We are in the process of renegotiating the bonds required to operate and anticipate collateralizing approximately
$11.5 million in bonds, which will be reflected in other assets on our consolidated balance sheets.
F- 32
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
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 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.
In September 2012, we received a Civil Investigative Demand (CID) from the Attorney General of the
Commonwealth of Massachusetts related to a pending investigation in connection with allegations that we caused
false claims to be submitted to the Commonwealth relating to student loans, guarantees and grants provided to
students at our Norwood, Massachusetts campus. The CID required us to produce documents and provide written
testimony regarding a broad range of our business from September 2006 to the September 2012. We responded
timely to the request. The Attorney General made a follow-up request for documents, and we complied with this
request in February 2013. In response to a status update request from us, the Attorney General requested and we
provided in April 2015 additional documents and information related to graduate employment at our Norwood,
Massachusetts campus and our policies and practices for determining graduate employment. We have not received
any additional requests since April 2015. At this time, we cannot predict the eventual scope, duration, outcome or
associated costs of this request and accordingly we have not recorded any liability in the accompanying consolidated
financial statements.
15. 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 one vote per share on all matters requiring shareholder approval. On October 5,
2015, December 18, 2015 and March 31, 2016, we paid cash dividends of $0.02 per share to common stockholders
of record as of September 28, 2015, December 4, 2015 and March 21, 2016, respectively. The aggregate payment
was approximately $1.5 million. On June 9, 2016, our Board of Directors voted to eliminate the quarterly cash
dividend on our common stock.
Preferred Stock
Preferred Stock consists of 10,000,000 authorized preferred shares of $0.0001 par value each. As of
September 30, 2016 and 2015, 700,000 and 0 shares of Series A Preferred Stock, respectively, were issued and
outstanding. The liquidation preference associated with the Series A Preferred Stock was $100 per share at
September 30, 2016.
F- 33
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Series A Convertible Preferred Stock
On June 24, 2016, we entered into a Securities Purchase Agreement (Purchase Agreement) with Coliseum
Holdings I, LLC (Purchaser) to sell to the Purchaser 700,000 shares of Series A Preferred Stock for a total purchase
price of $70.0 million. The proceeds from the offering are intended to be used to fund strategic long-term growth
initiatives, including the expansion to new markets of campuses on a scale similar to our Long Beach, California
and Dallas/Ft. Worth, Texas campuses and the creation of new programs in existing markets with under-utilized
campus facilities. Additionally, we may use the proceeds to fund strategic acquisitions that complement our core
business. The Series A Preferred Stock is perpetual, and therefore does not have a maturity date. In conjunction
with this purchase, we incurred $1.2 million in stock issuance costs, which were recorded as a reduction of the
additional paid-in capital associated with the Series A Preferred Stock.
The description below provides a summary of certain material terms of the Series A Preferred Stock
pursuant to the Purchase Agreement and set forth in the Certificate of Designations (Certificate) of the Series A
Preferred Stock:
Rank
The Series A Preferred Stock will, with respect to dividend rights and rights upon liquidation, winding
up or dissolution, rank senior to our common stock and each other junior class or series of shares that we may
issue in the future. The Series A Preferred Stock will also rank junior to any future indebtedness.
Dividends
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). Such dividend shall be paid before any dividends would
be declared or paid to common stockholders or other junior stockholders. 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 will begin to accrue on the first day of the applicable dividend period. We paid Cash Dividends
of $1.4 million during the year ended September 30, 2016.
The Series A Preferred Stock includes participation rights such that, in the event that we pay a dividend
or make a distribution on the outstanding common stock, we shall also pay to each holder of the Series A Preferred
Stock a dividend on an as converted basis.
If we are required to or elect to obtain stockholder and regulatory approval and if such approval is not
obtained within the time periods set forth in the Certificate, the dividend rates with respect to the Cash Dividend
and Accrued Dividend will be increased by 5.0% per year, not to exceed a maximum of 14.5% per year, subject
to downward adjustment on obtaining the foregoing approvals.
Liquidation Preference
In the event of voluntary or involuntary liquidation, dissolution or winding up of our company, holders
of the Series A Preferred Stock are entitled to receive, before any distribution or payment to the holders of any
common or junior stock, an amount per share of Series A Preferred Stock equal to the liquidation preference then
in effect, which would include any Accrued Dividends. Alternatively, the holder may choose to receive the amount
F- 34
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
that would be payable per share of common stock issued upon conversion of the Series A Preferred Stock
immediately prior to such liquidation event.
Mergers (regardless of whether we remain the surviving entity), sale of substantially all of our assets or
any other recapitalization, reclassification or other transaction in which substantially all of our common stock is
exchanged or converted into cash or other property are considered Deemed Liquidation Events. The agreement
provides that, in the case of a Deemed Liquidation Event, each holder of Series A Preferred Stock shall be entitled
to receive the liquidation amount they would receive under a normal liquidation event; however, the liquidation
amount must be in the same form of consideration as is payable to the holders of our common stock.
Voting
Holders of shares of Series A Preferred Stock will be entitled to vote with the holders of shares of common
stock on an as-converted basis. The holders of the Series A Preferred Stock may vote only to an extent not to exceed
4.99% of the aggregate voting power of all of our voting stock outstanding at the close of business on the issue
date (Investor Voting Cap), until such time that we seek regulatory approval to remove this cap. Additionally, a
majority of the voting power of the Series A Preferred Stock must approve certain significant actions, including,
among others, the issuance of certain equity securities; the repurchase, redemption or acquisition of our common
stock; the incurrence of debt; the payment of dividends or distributions to any junior stock prior to December 31,
2017; the consummation of certain acquisitions, mergers or other such transactions; and the sale of material assets.
Coliseum Capital Management, LLC, an affiliate of the Purchaser, and its affiliates also beneficially own
3,601,724 shares of our common stock, as reported in a form 13D/A filed with the SEC on June 28, 2016; this
represents approximately 14.6% of our outstanding common stock. There is no voting limitation on this common
stock.
Conversion
Conversion Rate and Conversion Price
The conversion rate for the Series A Preferred Stock will be calculated by dividing the current liquidation
preference by the conversion price then in effect. The initial conversion price for the Series A Preferred Stock is
$3.33 per share. The conversion price is subject to adjustment upon the occurrence of certain common stock events,
as defined in the Purchase Agreement, including stock splits, reverse stock splits or the issuance of common stock
dividends.
Optional Conversion by Purchaser
Shares of Series A Preferred Stock are convertible in common stock at any time at the option of the holder.
The Series A Preferred Stock may be converted only to the extent that the number of shares of common stock
issued upon conversion does not exceed 4.99% of the total share of common stock outstanding on the issue date
(Conversion Cap). The Conversion Cap was calculated to be 1,225,227 shares on the issue date of June 24, 2016,
and may be removed upon regulatory approval.
Optional Conversion by Our Company
If at any time following the third anniversary of the issuance of the Series A Preferred Stock, the volume
weighted average price of our common stock equals or exceeds 2.5 times the conversion price of the Series A
Preferred Stock for a period of 20 consecutive trading days (Conversion Trigger), we may, at our option and subject
to obtaining any required stockholder and regulatory approvals, require that any or all of the then outstanding
F- 35
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
shares of Series A Preferred Stock be automatically converted into our common stock at the conversion rate. We
may not elect such conversion during the closed trading window periods in which any director or executive officer
of our company is prohibited by us to, directly or indirectly, purchase, sell or otherwise acquire or transfer any
equity security of our company. If we are unable to obtain the necessary regulatory approvals to remove the
Conversion Cap within 120 days of giving our notice of intent to convert, we will have the option to redeem all
shares of the Series A Preferred Stock at a premium.
Optional Special Dividend and Conversion on Certain Change of Control
Upon a change of control, at the written election by holders of a majority of the then outstanding shares
of Series A Preferred Stock, we shall declare and pay a special cash dividend in the amount equal to either 1.5 or
2.0 times the Cash Dividend rate, depending on the type of change in control, multiplied by the liquidation preference
per share then in effect.
Redemption at the Option of Our Company
We have the ability to redeem the Series A Preferred Stock at any time after the third anniversary of the
issue date, provided that the Conversion Trigger has not been met on the date of the redemption notice. Holders
of the Series A Preferred Stock will be able to convert their shares into common stock if neither the Investor Voting
Cap nor Conversion Cap is in effect. If they do not provide notice of conversion within 10 days of receipt of the
redemption notice, the redemption will proceed at a price per share equal to the product of the current conversion
rate and 2.5 times the conversion price. If either the Investor Voting Cap or Conversion Cap is in effect at the date
of the notice of redemption, the holder may request that we obtain the necessary regulatory approval for its removal.
After the tenth anniversary of the issue date, we have the ability to redeem the Series A Preferred Stock
in whole or in part at any time. Holders of the Series A Preferred Stock will then be able to convert their shares
into common stock if neither the Investor Voting Cap nor Conversion Cap is in effect. If they do not provide notice
of conversion within 10 days of receipt of the redemption notice, the redemption will proceed at a price per share
equal to the current liquidation preference. If either the Investor Voting Cap or Conversion Cap is in effect at the
date of the notice of redemption, the holder may request that we obtain the necessary regulatory approval for its
removal.
Anti-dilution
The conversion price of the Series A Preferred Stock is subject to certain customary anti-dilution
protections should we effect certain common stock events, such as stock splits, stock dividends or subdivisions,
reclassifications or combinations of our common stock. In such events, the conversion price will be adjusted in a
proportionate manner to the change in outstanding share of common stock immediately preceding and immediately
after the event.
Reservation of Shares Issuable upon Conversion
We are required, at all times, to reserve and keep available out of our authorized and unissued shares of
common stock the number of shares that would be issuable upon conversion of all Series A Preferred Stock,
assuming that the Conversion Cap does not apply. If this reserve is not sufficient at any point to allow for full
conversion, we shall be required to take action to increase our pool of authorized but unissued shares.
F- 36
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Under the Securities Act, we were not required to register the offer or sale of the Series A Preferred
Stock to the Purchaser. In conjunction with the Purchase Agreement, the parties entered into a Registration Rights
Agreement in order to grant the Purchaser certain demand and piggyback registration rights covering the purchased
shares. In the event that the Purchaser requests such registration of the Series A Preferred Stock, the Registration
Rights agreement provides that we shall bear all expenses associated with the registration, with the exception of
underwriting discounts and commissions and brokerage fees.
Share Repurchase Program
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. 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 the share repurchase program at any time without prior
notice. During the year ended September 30, 2016, we did not repurchase shares. As of September 30, 2016, we
have repurchased 1,677,570 shares at an average price per share of $9.09 and a total cost of approximately $15.3
million under this program. Under the terms of the Purchase Agreement, stock purchases under this program require
the approval of a majority of the voting power of the Series A Preferred Stock.
Stockholder Rights Agreement
On June 29, 2016, our Board of Directors authorized the adoption of a stockholder Rights Agreement to
protect against any potential future use of coercive or abusive takeover techniques and to ensure that our stockholders
are not deprived of the opportunity to realize the full and fair value of their investment. This agreement, which
expires on June 28, 2017, mitigates the risk of any person or group from acquiring beneficial ownership of 15%
or more of our outstanding common stock, or, in the case of any person or group that already owns 15% or more
of the outstanding common stock, an additional 0.25%.
Under this agreement, our Board of Directors declared a dividend of one preferred stock purchase right
for each outstanding share of common stock, payable to holders of record as of the close of business on July 11,
2016. Each right, which is exercisable only in the event of potential takeover, initially entitles the holder to purchase
one one-thousandth of a share of a newly authorized series of participating preferred stock designated as Series E
Junior Participating Preferred Stock, with a par value of $0.0001 per share and a purchase price of $9.00 per share,
subject to adjustment. Each share of Series E Junior Participating Preferred Stock shall entitle the holder to 1,000
votes on all matters submitted to a vote of our stockholders.
Stock Option and Incentive Compensation Plans
We have two stock-based compensation plans; the Management 2002 Stock Option Program (2002 Plan)
and the 2003 Incentive Compensation Plan (2003 Plan).
The 2002 Plan was approved by our Board of Directors on April 1, 2002 and provided for the issuance of
options to purchase 0.7 million shares of our common stock. On February 25, 2003, our Board of Directors
authorized an additional 0.1 million options to purchase our common stock under the 2002 Plan.
Options issued under the 2002 Plan vest ratably each year over a four-year period. The expiration date of
options granted under the 2002 Plan is the earlier of the ten-year anniversary of the grant date; the one-year
anniversary of the termination of the participant’s employment by reason of death or disability; 30 days after the
date of the participant’s termination of employment if caused by reasons other than death, disability, cause, material
breach or unsatisfactory performance or on the termination date if termination occurs for reasons of cause, material
breach or unsatisfactory performance. We do not intend to grant any additional options under the 2002 Plan.
F- 37
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
The 2003 Plan was approved by our Board of Directors and adopted effective December 22, 2003 upon
consummation of our initial public offering and amended on February 28, 2007 and February 22, 2012 by our
stockholders. The 2003 Plan, as amended, authorizes the issuance of various common stock awards, including
stock options, restricted stock and stock units, for approximately 5.3 million shares of our common stock.
As of September 30, 2016, 2.3 million shares of common stock were reserved for issuance under the 2003
Plan, of which 1.4 million shares are available for future grant.
We use historical data to estimate forfeitures. Our estimated forfeitures are adjusted as actual forfeitures
differ from our estimates, resulting in stock-based compensation expense only for those awards that actually vest.
If factors change and different assumptions are employed in future periods, previously recognized stock-based
compensation expense may require adjustment. Beginning October 1, 2016, we early adopted the guidance issued
by the FASB in March 2016 and, going forward, will account for forfeitures as they occur.
The following table summarizes the operating expense line and the impact on net income (loss) in the
consolidated statements of income (loss) in which stock-based compensation expense has been recorded:
Educational services and facilities
Selling, general and administrative
Total stock-based compensation expense
Income tax benefit
Restricted Stock Awards
Year Ended September 30,
2015
2014
2016
$
$
$
280
4,624
4,904
1,873
$
$
$
294
3,971
4,265
1,629
$
$
$
587
5,134
5,721
2,288
Our restricted stock awards are issued at fair market value, which is based on the closing prices of our stock
on the grant date, discounted for non-participation in anticipated dividends during the vesting period. The
restrictions on these awards generally lapse ratably over a four or five year period based on the terms of the
individual grant. The restrictions associated with our restricted stock awarded under the 2003 Plan will lapse upon
the death, disability, or if, within one year following a change of control, employment is terminated without cause
or for good reason. If employment is terminated for any other reason, all shares of restricted stock shall be forfeited
upon termination.
The following table summarizes restricted stock activity under the 2003 Plan:
Number of Shares
(In thousands)
Weighted Average
Grant Date
Fair Value
per Share
Nonvested restricted stock outstanding as of September 30, 2015
Restricted stock vested
Restricted stock forfeited
Nonvested restricted stock outstanding as of September 30, 2016
218
$
(136) $
(24) $
$
58
12.85
13.09
12.62
12.38
As of September 30, 2016, unrecognized stock compensation expense related to restricted stock awards was
$0.7 million which is expected to be recognized over a weighted average period of 1.0 year.
F- 38
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
There were no restricted stock awards granted during the years ended September 30, 2016, 2015 and 2014.
Restricted Stock Units
Our restricted stock units are issued at fair market value, which is based on the closing prices of our stock
on the grant date, discounted for non-participation in anticipated dividends during the vesting period. The
restrictions on these units generally lapse ratably over a four or five year period based on the terms of the individual
grant. The restrictions associated with our restricted stock units awarded under the 2003 Plan will lapse upon the
death, disability, or if, within one year following a change of control, employment is terminated without cause or
for good reason. If employment is terminated for any other reason, all shares of restricted stock shall be forfeited
upon termination. The awards to our Chairman of the Board, Chief Executive Officer and President and to our
former President and Chief Financial Officer were made pursuant to updated forms of award agreements that
implement certain retirement vesting provisions of such executives' April 2014 employment agreements. The
updated award agreements include a provision for continued vesting for 12 months after a qualifying retirement,
as defined by these executives' respective employment agreements and subject to compliance with certain
covenants.
The following table summarizes restricted stock unit activity under the 2003 Plan:
Nonvested restricted stock units outstanding as of September 30, 2015
Restricted stock units awarded
Restricted stock units vested
Restricted stock units forfeited
Nonvested restricted stock units outstanding as of September 30, 2016
Number of Shares
(In thousands)
Weighted
Average
Grant Date
Fair Value
per Share
$
995
535
$
(325) $
(247) $
$
958
6.76
2.30
7.45
4.55
4.61
As of September 30, 2016, unrecognized stock compensation expense related to restricted stock awards was
$3.7 million which is expected to be recognized over a weighted average period of 1.7 years.
The following table summarizes the weighted average fair values of the restricted stock units granted:
Year Ended September 30,
2016
2015
2014
Weighted average grant date fair value per share
$
2.30
$
4.49
$
10.05
The assumed quarterly dividend rate was $0.10 per share for restricted stock units granted during the years ended
September 30, 2014 and during the first nine months of the year ended September 30, 2015. The assumed quarterly
dividend rate was $0.02 per share for restricted stock units granted during the three months ended September 30,
2015. The assumed quarterly dividend rate was $0.00 per share for restricted stock units granted during the year
ended September 30, 2016 due to the elimination of the quarterly cash dividend by our Board of Directors on June
9, 2016; the only awards granted during year were granted in September 2016.
F- 39
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
16. Earnings per Share
Basic net income (loss) per share has historically been calculated by dividing net income (loss)
attributable to common stock by the weighted average number of common shares outstanding for the period. 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. As such, for periods subsequent to the issuance of the Series A Preferred Stock,
we calculated basic earnings per share pursuant to the two-class method. The two-class method is an earnings
allocation formula that determines earnings per share 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 (loss) per share 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. The two-class method was not applicable for the year ended September 30, 2016.
Diluted earnings (loss) per share is calculated using the more dilutive of the as-converted or the two-
class method. The two-class method assumes conversion of all potential shares other than the participating
securities. Dilutive potential common shares include outstanding stock options, unvested restricted share awards
and units and convertible preferred stock. For the years ended September 30, 2016 and 2015, diluted loss per share
equaled basic loss per share as the assumed activity related to outstanding stock-based grants would have an anti-
dilutive effect.
The following table summarizes the computation of basic and diluted earnings (loss) per share under
the as-converted method:
2016
Year Ended September 30,
2015
(In thousands)
2014
Income (loss) available for distribution
$
(49,120) $
(9,149) $
2,037
Weighted average number of shares
Basic shares outstanding
Dilutive effect related to employee stock plans
Diluted shares outstanding
24,313
—
24,313
24,391
—
24,391
Net income (loss) per share - basic
Net income (loss) per share - diluted
$
$
(2.02) $
(2.02) $
(0.38) $
(0.38) $
24,640
280
24,920
0.08
0.08
F- 40
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
The following table summarizes the potential weighted average shares of common stock that were
excluded from the determination of our diluted shares outstanding as they were anti-dilutive:
Outstanding stock-based grants
Convertible preferred stock
Year Ended September 30,
2016
2015
2014
(In thousands)
816
5,629
6,445
1,044
—
1,044
884
—
884
17. Defined Contribution Employee Benefit Plan
We sponsor a defined contribution 401(k) plan, under which our employees elect to withhold specified
amounts from their wages to contribute to the plan and we have a fiduciary responsibility with respect to the plan.
The plan provides for matching a portion of employees’ contributions at management’s discretion. All contributions
and matches by us are invested at the direction of the employee in one or more mutual funds or cash. We made
matching contributions of approximately $0.7 million, $0.2 million and $1.1 million for the years ended
September 30, 2016, 2015 and 2014, respectively.
F- 41
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
18. 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
investments 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. Depreciation and amortization includes amortization of assets subject to financing obligation.
Summary information by reportable segment is as follows:
Revenues
Postsecondary education
Other
Consolidated
Income (loss) from operations
Postsecondary education
Other
Consolidated
Depreciation and amortization (1)
Postsecondary education
Other
Consolidated
Net income (loss)
Postsecondary education
Other
Consolidated
Goodwill
Postsecondary education
Other
Consolidated
Total assets
Postsecondary education
Other
Consolidated
Year Ended September 30,
2015
2014
2016
334,156
12,990
347,146
$
$
(13,980) $
(4,643)
(18,623) $
17,222
527
17,749
$
$
(44,467) $
(3,229)
(47,696) $
350,682
11,992
362,674
$
$
367,630
10,763
378,393
(5,911) $
(3,312)
(9,223) $
18,888
267
19,155
$
$
(7,477) $
(1,672)
(9,149) $
9,045
(2,708)
6,337
20,121
353
20,474
3,272
(1,235)
2,037
2016
As of September 30,
2015
2014
8,222
783
9,005
289,688
7,471
297,159
$
$
$
$
8,222
—
8,222
266,922
7,380
274,302
$
$
$
$
20,579
—
20,579
282,529
5,540
288,069
$
$
$
$
$
$
$
$
$
$
$
$
(1) Excludes depreciation of training equipment obtained in exchange for services of $1.3 million, $1.2 million and
$1.2 million for the years ended September 30, 2016, 2015 and 2014, respectively.
F- 42
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
19. Government Regulation and Financial Aid
Our institutions are subject to extensive regulation by federal and state governmental agencies and
accrediting bodies. In particular, HEA, and the regulations promulgated thereunder by ED, subject the institutions
to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate
in the various federal student financial assistance programs under Title IV of the HEA.
To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction
by relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified
as an eligible institution by ED. ED will certify an institution 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. The Program
Participation Agreement (PPA) document serves as ED’s formal authorization of an institution and its associated
additional locations to participate in Title IV Programs for a specified period of time. Universal Technical Institute
of Arizona and Universal Technical Institute of Phoenix were last recertified in October 2010 and entered into new
PPAs with ED which expired on June 30, 2016. In accordance with ED guidance, we submitted materially complete
applications for recertification prior to the June 30, 2016 expiration, allowing these institutions to continue to fully
participate until ED makes a determination of recertification. Universal Technical Institute of Texas was recertified
in February 2012 and entered into a new PPA with ED which will expire March 31, 2018.
State Authorization
Each of our institutions must be authorized by the applicable state education agency where the institution
is located to operate and offer a postsecondary education program to its students. Our institutions are subject to
extensive, ongoing regulation by each of these states. Additionally, our institutions are required to be authorized
by the applicable state education agencies of certain other states in which our institutions recruit students. If any
one 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.
Accreditation
Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing
qualitative reviews by an organization of peer institutions. Accrediting commissions primarily examine the
academic quality of the institution’s instructional programs. A grant of accreditation is generally viewed as
confirmation that the institution’s programs meet generally accepted academic standards. Accrediting commissions
also review the administrative and financial operations of the institutions they accredit to ensure that each institution
has the resources necessary to perform its educational mission.
Accreditation by an ED recognized commission is required for an institution to be certified to participate
in Title IV Programs. In order to be recognized by ED, accrediting commissions must adopt specific standards for
their review of educational institutions. All of our institutions are accredited by the Accrediting Commission of
Career Schools and Colleges, an accrediting commission recognized by ED.
An accrediting commission may place an institution on reporting status to monitor one or more specified
areas of performance in relation to the accreditation standards. An institution placed on reporting status is required
to report periodically to the accrediting commission on that institution’s performance in the area or areas specified
by the commission.
F- 43
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Regulation of Federal Student Financial Aid Programs
Congress continues to be focused on for-profit education institutions, specifically regarding participation
in Title IV Programs and U.S. DOD oversight of tuition assistance for military service members attending for-
profit colleges. This Congressional activity could result in the enactment of more stringent legislation by Congress,
further rulemakings affecting participation in Title IV Programs and other governmental actions, increasing
regulation of the for-profit sector. Action by Congress may also increase our administrative costs and require us
to modify our practices in order for our institutions to comply with Title IV Program requirements. In addition,
concerns generated by this Congressional activity may adversely affect enrollment in for-profit educational
institutions such as ours.
Political and budgetary concerns significantly affect Title IV Programs. Congress has historically
reauthorized the HEA approximately every five to six years with the last reauthorization in 2008; a new
reauthorization process has begun. Significant factors relating to Title IV Programs that could adversely affect us
include the following:
Gainful Employment
ED published a final gainful employment rule on October 31, 2014. Most parts of the new rule were
effective on July 1, 2015, except new disclosure requirements which take effect January 1, 2017. The final rule
requires institutions to satisfy one of two debt-to-earnings (DE) ratios in order to maintain Title IV Program
eligibility. The rule also requires institutions to make certain certifications respecting each of their gainful
employment programs, to annually report certain information to ED, and to make disclosures to prospective students
and the public.
In October 2016, ED issued to our schools draft versions of the first set of DE rates to be issued under
the new rule. Under these draft DE rates for the 2015 debt measure year, none of our programs had failing rates.
Nine of our 12 educational programs achieved passing rates, and the other three programs were in the zone. The
three programs in the zone are the Collision Repair, Automotive and Motorcycle programs at our Universal
Technical Institute of Phoenix institution, which includes our MMI Phoenix, Arizona and Orlando, Florida
campuses and our Sacramento, California campus. All of the programs at our Universal Technical Institute of
Arizona and Universal Technical Institute of Texas institutions had passing draft DE rates. The draft DE rates are
subject to data challenges and to further adjustments before ED issues final versions of these rates and, therefore,
may be subject to change. The final DE rates are expected to be issued in early 2017. The next set of rates for the
2016 debt measure year is expected to be issued later in 2017, although we cannot predict with certainty when the
draft and final versions of the rates will be issued. With respect to future DE rates, we are not able to develop
reliable projections of our programs' performance under the final rule because we do not have access to the SSA
earnings data that is used in the calculations.
Defense to Repayment Regulations
On November 1, 2016, ED published final regulations establishing new rules regarding, among other
things, the ability of borrowers to obtain discharges of their obligations to repay certain Title IV loans and for ED
to initiate a proceeding to collect from the institution the discharged and returned amounts and the extensive list
of circumstances that may require institutions to provide letters of credit or other financial protection to ED. The
new regulations, among other things:
• Establish amended procedures and standards for borrowers, either individually or as a group, to assert
through an ED-administered process a defense to the borrowers’ obligation to repay certain Title IV loans
based on certain acts or omissions of the institution. The regulations also expand the types of defenses
available for loans first disbursed on or after July 1, 2017. If ED approves the borrower’s defense to
F- 44
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
repayment through the applicable administrative process established in the proposed regulations, ED may
discharge the borrower’s obligation to repay some or all of the borrower’s student loans and may initiate
a separate proceeding to collect from the institution the discharged and returned amounts.
• Revise the financial responsibility regulations to expand the list of actions or events that would require
an institution to provide ED with a letter of credit or other form of acceptable financial protection and
potentially be subject to other conditions and requirements. The specified list of events is extensive and
includes, among other potential triggers, certain debts or liabilities arising from settlements or final
judgments in judicial or administrative proceedings and certain lawsuits pending for 120 days and initiated
by a federal or state authority against the institution with respect to Direct Loans or educational services;
certain other lawsuits in which the institution’s summary judgment motion was denied or not filed, certain
closures of one or more of the institution’s locations, one or more gainful employment programs with
gainful employment rates that could result in the program becoming ineligible in the next award year,
certain withdrawals of owner’s equity from the institution including by dividend, failure to comply with
the 90/10 Rule for the most recently completed fiscal year, SEC warning that it may suspend trading on
the institution’s stock, failure to file certain reports with the SEC, the exchange on which the institution’s
stock is traded notifying the institution that it is not in compliance with exchange requirements or that its
stock is delisted, cohort default rates of at least 30 percent for its two most recent rates, certain significant
fluctuations in Title IV funding, certain citations for failure to comply with state agency requirements,
failure to comply with yet to be developed ED financial stress tests, high annual dropout rates, the institution
being placed on probation or issued a show-cause or similar action by its accrediting agency, certain
violations of loan agreements, expected or pending claims for borrower relief discharges, and certain
other events that ED might identify as reasonably likely to have a material adverse effect on the financial
condition, business or results of operations of the institutions.
• Require proprietary institutions with student loan repayment rates, as defined in the regulations, below
prescribed thresholds to provide an ED-prepared warning to prospective and enrolled students, as well
as placement of the warning on its website and in all promotional materials and advertisements.
•
Prohibit the use and reliance upon certain contractual provisions regarding dispute resolution processes,
such as pre-dispute arbitration agreements or class action waivers, and require certain notifications,
contract provisions and disclosures by institutions regarding students’ ability to participate in certain class
action lawsuits or initiate certain lawsuits instead of through arbitration.
The new regulations have a general effective date of July 1, 2017.
90/10 Rule
A for-profit institution loses its eligibility to participate in Title IV Programs if it derives more than 90%
of its revenue from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula
mandated by ED. The loss of such eligibility would begin on the first day following the conclusion of the second
consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already
received by the institution and its students during a period of ineligibility would have to be returned to ED or a
lender. Additionally, if an institution exceeds the 90% level for a single year, ED will place the institution on
provisional certification for a period of at least two years. For the year ended September 30, 2016, approximately
72% of our revenues, on a cash basis, were derived from funds distributed under Title IV Programs, as calculated
under the 90/10 rule.
F- 45
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
Federal Student Loan Defaults
To remain eligible to participate in Title IV Programs, institutions must maintain federal student loan
cohort default rates below specified levels. An institution whose cohort default rate is 30% or more for three
consecutive federal fiscal years (FFYs) or 40% or more for any given FFY loses eligibility to participate in some
or all Title IV Programs. This sanction is effective for the remainder of the FFY in which the institution lost its
eligibility and for the two subsequent FFYs. None of our institutions had a three-year FFEL/DL cohort default rate
of 30% or greater for 2012, 2011 or 2010, the three most recent FFYs with published rates.
Financial Responsibility Standards
An institution’s financial responsibility is measured by its composite score, which is calculated by ED
based on three ratios. ED assigns a strength factor to the results of each of these ratios on a scale from negative
1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength.
ED then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to
produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be
deemed financially responsible without the need for further oversight. In addition to having an acceptable composite
score, an institution must, among other things, meet all of its 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 and not receive an adverse, qualified, or disclaimed opinion by its accountants in its
audited financial statements. If ED determines that an institution does not satisfy its financial responsibility
standards, depending on the resulting composite score and other factors, that institution may establish its financial
responsibility on an alternative basis.
If an institution's composite score is below 1.5, but is at least 1.0, the institution is in a category classified
by ED as the zone. Under ED regulations, institutions in the zone solely because their composite score is less than
1.5 are still considered to be financially responsible, but require additional oversight by ED in the form of cash
monitoring and other participation requirements. Institutions in the zone typically are permitted by ED to continue
to participate in the Title IV programs under one of two alternatives: 1) the “Zone Alternative” under which an
institution is required to make disbursements to students under a payment method other than ED’s standard
repayment, typically the Heightened Cash Monitoring 1 (HCM1) payment method; to notify ED within 10 days
after the occurrence of certain oversight and financial events and to comply with other operating conditions imposed
by ED or 2) submit a letter of credit to ED equal to at least 50 percent of the Title IV funds received by the institutions
during the most recent fiscal year. ED permits an institution to participate under the “Zone Alternative” for a period
of up to three consecutive fiscal years. Under the “Zone Alternative” notification requirement under regulations
in effect until July 1, 2017, the institution must provide timely information to ED regarding any of the following
oversight and financial events:
•
•
•
•
•
any adverse action, including a probation or similar action, taken against the institution by its accrediting
agency, state authority or other federal agency;
any event that causes the institution to realize any liability that was noted as a contingent liability in the
institution's most recent audited financial statements;
any violation by the institution of any loan agreement;
any failure of the institution to make a payment in accordance with its debt obligations that results in a
creditor filing suit to recover funds under those obligations;
any withdrawal of owner's equity/net assets from the institution by any means, including by declaring a
dividend;
F- 46
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
•
•
any extraordinary losses as defined in accordance with generally accepted accounting principles; or
any filing of a petition by the institution for relief in bankruptcy court.
Under the new regulations that take effect on July 1, 2017, the list of information that an institution must
provide timely to ED will change to the following: any event that causes the institution, or a related entity, to
realize any liability that was noted as a contingent liability in the institution’s or related entity’s most recent audited
financial statement or any losses that are unusual in nature and infrequently occur or both as defined in accordance
with certain specified accounting standards. The institution also will be required to notify ED of certain other
events described in the new Defense to Repayment regulations. ED could impose a letter of credit or other conditions
or requirements upon us in response to the reporting of any oversight or financial events.
Under the HCM1 payment method, the institution is required to make Title IV disbursements to eligible
students and parents before it requests or receives funds for the amount of those disbursements from ED. As long
as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw
down funds through ED’s electronic system for grants management and payments for the amount of disbursements
made to eligible students. Unlike the Heightened Cash Monitoring 2 (HCM2) or reimbursement payment methods,
the HCM1 payment method typically does not require institutions to submit documentation to ED and wait for ED
approval before drawing down Title IV funds. ED may place an institution that is in the zone on the HCM2 or
reimbursement methods of payment. Under regulations published on October 30, 2015 with an effective date of
July 1, 2016, an institution on the HCM1, HCM2 or reimbursement payment methods must pay any credit balances
due to a student or parent before drawing down funds from ED for the amount of disbursements made to the student
or parent.
Under current regulations in effect until July 1, 2017, if an institution's composite score is below 1.0, the
institution is considered by ED to lack financial responsibility. If ED determines that an institution does not satisfy
ED's financial responsibility standards, depending on its composite score and other factors, that institution may
establish its financial responsibility on an alternative basis by, among other things:
•
•
posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received
by the institution during its most recently completed fiscal year; or
posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program
funds, accepting provisional certification for a period of no more than three years, complying with
additional ED notification and operating requirements and conditions and agreeing to receive Title
IV Program funds under an arrangement other than ED's standard advance funding arrangement.
Under new regulations that take effect on July 1, 2017, ED may increase this amount to account for
ED’s determination of the additional amount of financial protection needed to fully cover any
estimated losses.
If an institution is unable to establish financial responsibility on an alternative basis, the institution may be subject
to financial penalties, restrictions on our operations and loss of external financial aid funding.
ED has published final regulations that amend the financial responsibility regulations to expand the list
of actions or events that require an institution to provide ED with a letter of credit or other form of acceptable
financial protection. The regulations also, among other things, may increase the amount of the letter of credit or
other form of financial protection that an institution must provide to ED if the institution has a composite score
below 1.0, no longer qualifies for the Zone Alternative or does not comply with other applicable requirements of
the financial responsibility regulations. These new requirements are scheduled to become effective on July 1,
2017.
F- 47
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
ED has historically evaluated the financial condition of our institutions on a consolidated basis based on
the financial statements of Universal Technical Institute, Inc. as the parent company. ED’s regulations permit ED
to examine the financial statements of Universal Technical Institute, Inc., the financial statements of each institution
and the financial statements of any related party. As anticipated, upon review of our 2015 financial statements and
composite score, ED communicated that we could elect the "Zone Alternative" option described above or post a
letter of credit representing 50% of the Title IV Program funds received by us during 2015. We elected the "Zone
Alternative" option and began disbursing funds under the HCM1 method on October 10, 2016 and are now subject
to the “Zone Alternative” notification requirement described above. In connection with the issuance of our Series
A Convertible Preferred Stock (Series A Preferred Stock) in June 2016, we received a request from ED to provide
a monthly student roster and a biweekly cash flow projection. ED extended this requirement as part of the "Zone
Alternative" option outlined above. We began complying with these reporting requirements in July 2016.
For our 2016 fiscal year, we calculated our composite score to be 1.7. However, the composite score
calculations and resulting requirements imposed on our institutions are subject to determination by ED once it
receives and reviews our audited financial statements. Moreover, ED may recalculate our composite score to
account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to
Repayment Regulations. If ED determines that our composite score is 1.5 or higher, our composite score would
be high enough for our institutions to be deemed financially responsible and could result in ED no longer requiring
us to comply with the "Zone Alternative" requirements or the requirement to use the HCM1 payment method.
Such determination would be subject to the absence of other factors supporting these requirements.
Return of Title IV Funds
An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program
funds that have been disbursed to students who withdraw from their educational programs before completing them.
The institution must return those unearned funds to ED or the appropriate lending institution in a timely manner,
which is generally within 45 days from the date the institution determines that the student has withdrawn. If an
institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the
students in the audit or program review sample, the institution must post a letter of credit in favor of ED in an
amount equal to 25% of the total Title IV Program funds that should have been returned in the previous fiscal year.
Because we operate in a highly regulated industry, we, like other industry participants, may be subject
from time to time to investigations, claims of non-compliance, or lawsuits by governmental agencies or third
parties, which allege statutory violations, regulatory infractions, or common law causes of action.
There can be no assurance that other regulatory agencies or third parties will not undertake investigations
or make claims against us, or that such claims, if made, will not have a material adverse effect on our business,
cash flows, results of operations or financial condition.
Compliance with Regulatory Standards and Effect of Regulatory Violations
Our institutions are subject to audits and program compliance reviews by various external agencies,
including ED, ED’s Office of Inspector General, state education agencies, student loan guaranty agencies, the VA
and ACCSC, as well as other federal and state agencies. Each of our institutions’ administration of Title IV Program
funds must also be audited annually by independent accountants and the resulting audit report submitted to ED
for review. If ED or another regulatory agency determined that one of our institutions improperly disbursed Title
IV Program funds or violated a provision of the HEA or ED’s regulations, that institution could be required to
repay such funds and could be assessed an administrative fine. ED could also transfer the institution from the
advance method of receiving Title IV Program funds to a cash monitoring or reimbursement system, which could
F- 48
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
negatively impact cash flow at an institution. Significant violations of Title IV Program requirements by us or any
of our institutions could be the basis for a proceeding by ED to fine the affected institution or to limit, suspend or
terminate the participation of the affected institution in Title IV Programs. Generally, such a termination extends
for 18 months before the institution may apply for reinstatement of its participation.
In April 2015, ED completed an ordinary course program review of our administration of the Title IV
programs in which we participate for our Avondale, Arizona campus and additional locations of that campus. The
site visit covered the 2013-2014 and 2014-2015 award years. We have not received the initial report from ED
regarding this matter.
Veterans' Benefits Programs
Since October 1, 2011, the Post-9/11 GI Bill has been effective for both degree and non-degree granting
institutions of higher learning, allowing eligible veterans to use their Post-9/11 GI Bill benefits at all of our
institutions. Additionally, veterans use benefits such as the Montgomery GI Bill, the REAP and VA Vocational
Rehabilitation at our campuses. We derived approximately 19% of our revenues, on a cash basis, from veterans'
benefits programs in 2016. To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the
Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain
requirements established by the VA. These criteria require, among other things, that the institution:
•
report on the enrollment status of eligible students;
• maintain student records and make such records available for inspection;
•
•
follow current VA rules; and
comply with applicable limits on the percentage of students receiving certain veterans benefits on a
program or campus basis.
The VA shares responsibility for VA benefit approval and oversight with designated State Approving
Agencies (SAAs). SAAs play a critical role in evaluating institutions and their programs to determine if they meet
VA benefit eligibility requirements. Processes and approval criteria as well as interpretation of applicable
requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval
in all states.
During 2012, President Obama signed an Executive Order directing the Departments of Defense, Veterans
Affairs and Education to establish “Principles of Excellence” (Principles), based on certain guidelines set forth in
the Executive Order, to apply to educational institutions receiving federal funding for service members, veterans
and family members. We are required to comply with the Principles to continue recruitment activities on military
installations. Additionally, there is a requirement to possess a memorandum of understanding (MOU) with the
U.S. DOD as well as with certain individual installations.
F- 49
UNIVERSAL TECHNICAL INSTITUTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($’s in thousands, except per share amounts)
20. Quarterly Financial Summary (Unaudited)
Year ended September 30, 2016
Revenues
Income (loss) from operations
Net income (loss)
Income (loss) per share:
Basic
Diluted
Year ended September 30, 2015
Revenues
Income (loss) from operations
Net income (loss)
Income (loss) per share:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
First
Quarter
89,773
(2,193) $
Fourth
Third
Second
Quarter (1)
Quarter (1)
Quarter (1)
$
86,915
$
82,266
$
88,192
$
(5,210) $
(5,450) $
(5,770) $
Fiscal
Year
347,146
(18,623)
(1,680) $
(32,002) $
(5,069) $
(8,945) $
(47,696)
(0.07) $
(0.07) $
(1.32) $
(1.32) $
(0.21) $
(0.21) $
(0.42) $
(0.42) $
(2.02)
(2.02)
First
Quarter
Second
Quarter
95,680
5,600
3,094
0.12
0.12
$
$
$
$
$
91,235
2,402
555
0.02
0.02
$
$
$
$
$
Third
Quarter
Fourth
Quarter (2)
90,653
85,106
$
$
(13,229) $
(3,996) $
(9,823) $
(2,975) $
Fiscal
Year
362,674
(9,223)
(9,149)
(0.12) $
(0.12) $
(0.41) $
(0.41) $
(0.38)
(0.38)
(1) During the three months ended March 31, 2016, we recorded a full valuation allowance on our deferred
tax assets. We will maintain a valuation allowance on our deferred tax assets until sufficient positive
evidence exists to support its reversal. See Note 13 for further discussion.
(2) The quarter ended September 30, 2015 included goodwill impairment of $12.4 million.
The summation of quarterly per share information does not equal amounts for the full year as quarterly
calculations are performed on a discrete basis. Additionally, securities may have had an anti-dilutive effect during
individual quarters but not for the full year.
F- 50
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-111899, 333-111900, and 333-180017 on
Form S-8 of our reports dated November 30, 2016, relating to the consolidated financial statements of Universal Technical
Institute, Inc. and subsidiaries, and the effectiveness of Universal Technical Institute, Inc. and subsidiaries' internal control
over financial reporting, appearing in this Annual Report on Form 10-K of Universal Technical Institute, Inc. and
subsidiaries for the year ended September 30, 2016.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
November 30, 2016
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-111899,
333-111900, 333-180017) of Universal Technical Institute, Inc. and subsidiaries of our report dated December 3, 2014
relating to the consolidated financial statements, which appears in this Form 10-K.
Exhibit 23.2
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
November 29, 2016
CERTIFICATION
Exhibit 31.1
I, Kimberly J. McWaters, certify that:
I have reviewed this Annual Report on Form 10-K of Universal Technical Institute, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
(b)
(c)
(d)
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
Date: November 30, 2016
/s/ Kimberly J. McWaters
Kimberly J. McWaters
Chairman of the Board, Chief Executive Officer and President
CERTIFICATION
Exhibit 31.2
I, Bryce H. Peterson, certify that:
I have reviewed this Annual Report on Form 10-K of Universal Technical Institute, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
(b)
(c)
(d)
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
Date: November 30, 2016
/s/ Bryce H. Peterson
Bryce H. Peterson
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Universal Technical Institute, Inc. (the
“Company”) for the year ended September 30, 2016, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Kimberly J. McWaters, Chief Executive Officer of the Company, certify,
to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Kimberly J. McWaters
Kimberly J. McWaters
Chairman of the Board, Chief Executive Officer and
President
Universal Technical Institute, Inc.
November 30, 2016
A signed original of this written statement required by Section 906 has been provided to Universal
Technical Institute, Inc. and will be retained by Universal Technical Institute, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
This certification accompanies this Annual Report on Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates
it by reference.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Universal Technical Institute, Inc. (the
“Company”) for the year ended September 30, 2016, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Bryce H. Peterson, Chief Financial Officer of the Company, certify, to
the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Bryce H. Peterson
Bryce H. Peterson
Chief Financial Officer
Universal Technical Institute, Inc.
November 30, 2016
A signed original of this written statement required by Section 906 has been provided to Universal
Technical Institute, Inc. and will be retained by Universal Technical Institute, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
This certification accompanies this Annual Report on Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates
it by reference.
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Shareholder information
Board of Directors
Corporate Officers
Request for Investor Information
Kimberly J. McWaters
Chairman & Chief Executive Officer
Bryce H. Peterson
Chief Financial Officer,
Executive Vice President
Chad A. Freed
General Counsel, Executive Vice
President of Corporate Development
and Secretary
Sherrell E. Smith
Executive Vice President,
Admissions and Operations
Jeffry B. May
Senior Vice President, Marketing
Rhonda R. Turner
Senior Vice President,
People Services
Universal Technical Institute, Inc.
Investor Relations
16220 North Scottsdale Road
Suite 100
Scottsdale, Arizona 85254
(623) 445-9500
The company will furnish a copy of
the 2016 Annual Report on Form
10-K without charge upon a written
request to the address above. In
addition, the electronic version of
the Annual Report can be found at
www.uti.edu, under the captions
Investors-Financial Information-
Annual Reports.
UTI has submitted the requisite
certification regarding its corporate
governance listing standards to
the New York Stock Exchange.
Common Stock
Traded on the New York Stock
Exchange under the symbol UTI
Transfer Agent
Computershare
P.O. Box 30170
College Station, TX 77845-3170
Independent Accountants
Deloitte & Touche LLP
2901 North Central Avenue
Suite 1200
Phoenix, Arizona 85012
Kimberly J. McWaters
Chairman & Chief Executive Officer,
Universal Technical Institute, Inc.
Conrad A. Conrad
Lead Director
Former Executive Vice President
and Chief Financial Officer,
The Dial Corporation
David A. Blaszkiewicz
Director
President and Chief Executive Officer,
Invest Detroit
LTG (R) William J. Lennox
Director
Former Superintendent of the
United States Military Academy
at West Point
President, Saint Leo University
Dr. Roderick R. Paige
Director
Former United States
Secretary of Education
Interim President,
Jackson State University
Roger S. Penske
Director
Chairman, Penske Automotive
Group, Inc.
Christopher S. Shackelton
Director
Managing Partner,
Coliseum Capital Management
Linda J. Srere
Director
Former President, Young and Rubicam
Advertising
Kenneth R. Trammell
Director
Chief Financial Officer, Tenneco, Inc.
John C. White
Director
Former Chairman of the Board,
Universal Technical Institute, Inc.
AVONDALE, ARIZONA
PHOENIX, ARIZONA
LONG BEACH, CALIFORNIA
RANCHO CUCAMONGA, CALIFORNIA
SACRAMENTO, CALIFORNIA
ORLANDO, FLORIDA
LISLE, ILLINOIS
NORWOOD, MASSACHUSETTS
MOORESVILLE, NORTH CAROLINA
EXTON, PENNSYLVANIA
DALLAS/FORT WORTH, TEXAS
HOUSTON, TEXAS
UTI.edu
PHOENIX, ARIZONA
ORLANDO, FLORIDA
ORLANDO, FLORIDA
MOORESVILLE, NORTH CAROLINA