10-Q Detective

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.

At December 31, UTI had committed to provide approximately $7.4 million, composed of 1,278 loans representing an average student balance of $5,755. It is likely as the recession drags on that student loan defaults will rise in coming quarters—which could jeopardize the company’s ability to access possible federal loans in the offing.

Although fuel prices per metric ton have receded more than 47 percent from record high levels, cruise operator Carnival admits that 2009 will be a challenging year, with weaker consumer spending resulting in falling demand and softer cruise pricing, and a stronger U.S. dollar (versus the Euro) hurting European markets. In addition, customers are opting to book trips closer to the actual date departure, looking for bargain pricing on these close-in bookings. Despite limited visibility in forward operating profitability, Carnvial remains committed to expanding berth capacity, according to the company’s 2008 regulatory 10-K filing:

As of January 28, 2009, we had signed agreements with three shipyards providing for the construction of 17 additional cruise ships scheduled to enter service between March 2009 and June 2012. These additions are expected to result in an increase in our passenger capacity of 38,056 lower berths. The net impact of these additions is a 22.5% increase in passenger capacity as compared to our January 28, 2009 passenger capacity [total of 169.040 lower berths on 88 ships].

Management remains optimistic that the long-term growth potential of the cruise industry remains healthy, given relatively modest market penetration in North America, the largest market for alternative vacations to land-based resorts. In 2008, 19.9% of Americans had cruise experience-with 51 million Americans expressing interest in taking a cruise by 2011-according to a Cruise Market Profile Study published by the Cruise Line Industry Association.

Expansion will not come cheap, however, as Carnival has $17.4 billion in cash obligations coming due through 2013, including: shipbuilding costs of $8.3 billion; long-term liabilities and interest payments totaling $8.1 billion and $2.5 billion; and, operating leases, port facilities, and other purchase obligations totaling $1.7 billion. In December 2008, Standard & Poor’s Rating Services assigned a negative outlook to Carnival’s A- credit rating, citing concern that the weakened state of the economy and continued pull back in consumer spending would pressure cash flow. Albeit the current state of the economy will likely lead to lower revenues in 2009, an analysis of the company’s balance sheet suggests a sequential decline in operating results would not materially impact Carnival’s ability to meet its debt obligations. For example, of the $17.4 billion, only $5.2 billion comes due in 2009, and long-term debt has a weighted-average maturity of five years.

In fiscal 2008, Carnival’s net cash from operations declined year-over-year 16.7% to $3.4 billion, reflecting the timing in receipt of customer deposits (as more guests opted for close-in bookings). Free cash flow was a negative $38 million, principally resulting from $2.7 billion spent on the ongoing shipbuilding program.

In light of the current uncertainties in the global economy and a desire to preserve cash and liquidity, the board of directors voted to suspend the quarterly division beginning in March 2009. This move will save about $1.2 billion in cash outflows this year.

At November 30, 2008, although Carnival had a working capital deficit of $4.1 billion, if one excluded customer deposits and debt obligations not maturing in 2009, the adjusted working capital deficit decreased to $950 million. Total debt was a manageable 32.9% of capital and a fixed-charge ratio of 5.8 times indicates the company has more than enough financial muscle to satisfy its existing financing expenses.

Despite the deteriorating global economy in 2008, net cruise revenues increased 12.9% year-on-year to $11.5 billion, driven by both a 6.7 percent increase in available passenger capacity and a 3.7% increase in passenger ticket prices, partially offset by a 1.6% decrease in onboard sales. Cruise occupancy held stable at 105.7 percent.

Carnival cannot cancel existing newbuld contracts without substantial financial penalties. I caution readers, therefore, that contrary to management’s optimism, If the recession persists into 2010, forcing consumers to opt out of cruises altogether, the company will likely need to access the debt markets for shipbuilding financing.

Lawrence Rogers, Chief Executive Officer of Sealy Corp., told analysts on the bedding manufacturer’s year-end earnings call that despite a reported 2008 loss of $2.9 million on a year-on-year 12 percent decrease in total net sales of $1.5 billion, he firmly believed that Sealy’s broad portfolio of brands, which includes Sealy Posturepedic, Stearns & Foster and Bassett brand names, across different price points — coupled with strong retail relationships and a diversified geographic presence — should position the company to maintain its leadership position in the bedding industry amid the challenging economic backdrop. [2007 wholesale market share was approximately 20.9 percent, almost 1.4 times greater than its next largest competitor, according to Furniture/Today, a furniture industry publication.] Albeit Sealy does have greater financial flexibility under recently amended credit agreements, lack of visibility into the timing of an economic turnaround could break an anemic balance sheet, as acknowledged in the 2008 regulatory 10-K filing:

• While we believe that we will have the necessary liquidity through our operating cash flow and revolving credit facility for the next year to fund our debt service requirements, capital expenditures and other operational cash requirements, we may not be able to generate sufficient cash flow from operations, realize anticipated revenue growth and operating improvements or obtain future borrowings under the senior credit agreements in an amount sufficient to enable us to do so. In addition, we rely on the revolving credit facility to provide a significant portion of our operational cash flow needs and debt service requirements. While this facility remains in place through April 2010, we expect there will be a need to refinance this debt upon its maturity. Additionally, the senior and subordinated debt mature in the following years through 2014, and we will likely be required to refinance this debt as it matures. We may not be able to affect any future refinancing of our debt on commercially reasonable terms or at all.

During the fourth quarter, Sealy successfully amended its credit agreement to increase the maximum leverage ratio under its financial covenants. The amendment increased the maximum permitted leverage ratio of total debt to EBITDA to 5.85 times through the third quarter of 2009; then stepping down to 5.50 times through the second quarter of 2010.

The amendment also loosened the minimum interest coverage to 2.0 times interest expense, increasing to 2.75 times by June 2010.

As of November 30, 2008, the company’s debt — net of cash — stood at $756.8 million, and Sealy’s leverage ratio of total debt to adjusted EBITDA and interest coverage ratio (as defined by the credit agreement) was 4.69 times and 2.87 times.

Rogers admitted on the conference call that the company does not expect to see year-over-year improvement until the second half of 2009. Operating under the notion that sales will continue below prior year levels, management will need to de-leverage its fixed costs, perhaps by shutting down assembly lines or even closing plants.

In addition, the company has a $9.2 million obligation arising from under-funded pension plans, which will require the company to contribute at least $1.2 million to the plans in 2009 (more if the realized returns are less than projected).

As mentioned, Sealy’s strategy is to weather the current retail slump by offering a breadth of product offerings across various price points. Once the global economy begins to recover, the company plans to capitalize on mattress sales at the premium end of the market (i.e. greater than $1,000 per set). However, if EBITDA drops below $130 million in 2009 — tripping debt covenants — opportunities for growth could quickly fall prey to a discounting policy mandated by bankers looking for debt repayments.

The Washington Post Company said sales at its newspaper publishing division and magazine unit for the third-quarter ended September 28 fell seven percent to $196.2 million and four percent to $59.9 million, respectively, as circulation and print advertising revenue continued to decline as readers and ad dollars migrate online. Albeit its newsprint businesses are awash in red ink, The Washington Post is positioned to survive the shakeout rocking the print media landscape, for it has presciently diversified into education products and related services with its 1984 acquisition of  Kaplan, a provider of college test preparation courses and post-secondary education programs. Education now accounts for more than 53 percent of total sales, according to the third-quarter 10-Q regulatory filing:

• Education division revenue totaled $602.7 million for the third quarter of 2008, a 17% increase over revenue of $514.6 million for the same period of 2007. Excluding revenue from acquired businesses, education division revenue increased 14% for the third quarter of 2008. Kaplan reported operating income of $51.1 million for the third quarter of 2008, up 36% from $37.6 million in the third quarter of 2007.

Kaplan’s domestic and international post-secondary education businesses remains a visible growth vehicle, as laid-off workers seek job re-tooling and the company expands its English-language and other educational course offerings outside the United States. Enrollments increased 22 percent year-on-year to 99,700 at September 30, 2008, due to growth in both online and fixed-facility programs.

Against the backdrop of The Tribune Company bankruptcy and continued turmoil in the credit markets, adequate liquidity is a pressing concern for all media properties. At September 28, The Washington Post had a working capital deficit of $420.9 million, a result of $399.9 million in unsecured notes due February 15, 2009. In my opinion, cash on hand of $247.9 million at the end of the third-quarter, free cash flow of $147 million, and a Moody’s Prime-1 investment grade rating should make it easier for the company to repay its short-term borrowings due and be sufficient to cover anticipated liquidity needs throughout 2009.