Would-Be Mechanics Defaulting on Student Loans at Universal Tech Institute

For the first quarter of fiscal 2009, Universal Technical Institute post anemic year-on-year net revenue growth of 0.1 percent to $90.1 million. The increase in net revenues related primarily to average tuition hikes of three percent to five percent, partially offset by an approximate two percent decline in average undergraduate full-time student enrollment and a decrease in students retaking courses.

Despite problems in the auto industry, Kimberly McWaters, President and Chief Executive Officer of UTI, a leading provider of technical education training in automotive, diesel, and collision repair, told analysts on the earnings call that strong year-over-year 82 percent growth in leads generated and a 20 percent increase in contracts written will drive comparable annual growth in average student population during the last half of fiscal 2009.

McWaters admitted, however, that growth in student populations lag such trends. At first-quarter ended December, average undergraduate full-time student capacity stood at only 66.2% of 24,670 total seats available. Albeit total starts increased by six percent to 3,319 newly enrolled students, actual show rates--defined as is the number of student starts as a percentage of those who were scheduled to start during the same timeframe--fell by 220 basis points in the quarter. After careful assessment of the drivers behind the decline, UTI management believes that weaknesses in the economy and/or concerns with the health of the automotive industry impacted students' ability to begin school as planned.

Given the solid growth in new contracts written, management opines that focusing on show rate improvement will drive gains in operating efficiencies, including capacity utilization. Looking ahead, the flaw in this premise, however, is that improving attendance will require higher military and veteran discounts--and more students are seeking an increase in need-based tuition scholarships--which will pressure margins.

In addition, in 2007, the federal government reduced the subsidies to student loan providers. UTI began funding the gap by easing loan accessibility to students, which has not been without risk. An increase in lending activity has increased default rates, according to UTI's first-quarter 2009 regulatory 10-Q filing:

Bad debt expense increased $1.2 million for the three months ended December 31, 2008. We monitor the adequacy of our allowance for doubtful accounts on an ongoing basis. In light of our experience during the past year related to the general economic conditions, changes in the student funding environment, and our internal execution challenges, we have increased our allowance for doubtful accounts by $0.6 million during the three months ended December 31, 2008. The remaining $0.6 million increase in bad debt expense is primarily due to an increase in the number of accounts which were transferred to our collections agency.