Bright Horizons Family Solutions Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Bright Horizons provides center-based child care, back-up care, and workforce education services. At quarter-end it operated 1,068 centers and served more than 1,400 employer clients. Results are unaudited.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $603.2m | $490.3m | $1,156.8m | $950.8m |
| Gross profit / margin | $136.6m / 22.6% | $128.5m / 26.2% | $258.2m / 22.3% | $238.6m / 25.1% |
| Operating income / margin | $45.5m / 7.5% | $47.8m / 9.8% | $76.2m / 6.6% | $79.0m / 8.3% |
| Net income | $20.6m | $24.9m | $28.7m | $44.4m |
| Diluted EPS | $0.35 | $0.42 | $0.50 | $0.74 |
| Adjusted EBITDA (non-GAAP) | $81.9m | $83.1m | $151.8m | $145.9m |
Q2 revenue rose 23%, led by center-based child care (+23%) and back-up care (+27%); educational advisory and other services increased 4%. For the first half, revenue grew 22%. Center-based growth reflected enrollment gains, tuition increases, and the July 2022 Only About Children acquisition. Back-up care delivered a record number of traditional network sessions in Q2.
Cash flow, debt and liquidity
- First-half operating cash flow was $180.0m, versus $125.8m a year earlier, primarily reflecting working-capital timing despite lower net income.
- First-half investing cash use was $68.7m, including $30.9m for acquisitions and $40.1m for fixed assets. Financing cash use was $86.5m.
- June 30 cash and cash equivalents were $66.0m ($76.4m including restricted cash). The company reported a $421.8m working-capital deficit.
- Debt was $970.2m net of financing costs and discounts; no revolver borrowings were outstanding. The $400m revolving facility had $385.7m available, after letters of credit.
- Debt bears variable interest. The company reported a 3.93% blended weighted-average rate for the first half, including hedges, and estimated approximately 4.50% for the remainder of 2023. It was in compliance with its financial covenant at quarter-end.
Material changes and management commentary
- Revenue growth did not translate into higher GAAP operating income or net income: Q2 operating income fell 5% and net income fell 17%. First-half operating income declined 4% and net income declined 35%.
- Gross margin contracted by about 3.6 percentage points in Q2 and 2.8 points for the first half. Management cited higher labor and back-up-care provider costs and reduced government support. Center staff average hourly wages increased about 8% year over year.
- Enrollment continued to recover but remained below pre-pandemic levels. Management expected further year-over-year occupancy improvement through the rest of 2023, with more modest improvement in the U.K. It also expected most eligible government-support programs to end by September 2023.
- Net interest expense increased to $12.2m in Q2 and $25.1m for the first half, reflecting higher rates, debt and interest on deferred acquisition consideration. The effective tax rate was 38.2% in Q2 and 43.7% for the first half, partly due to unbenefited foreign losses and stock-compensation tax shortfalls.
- The company recorded a $6.0m expense for a prior-period VAT error correction in the first half ($4.3m in cost of services and $1.7m in SG&A). Management characterized the correction as immaterial.
- First-half government benefits reduced cost of services by $35.1m, down from $46.7m in the prior-year period; $1.2m of tuition support was recorded as revenue, versus $3.4m.
Outlook, risks and contingencies
The filing provides no formal revenue or earnings guidance. Management said operating cash flow was expected to improve as centers re-ramp and believed cash, operating cash flows, and revolver availability would fund obligations for at least 12 months. It noted additional financing could be needed following renewed disruption or significant acquisitions or facility investments, and such financing might not be available on reasonable terms.
Key cited exposures include labor availability and wage inflation, center enrollment and occupancy recovery, the expected decline in government support, higher variable interest rates, foreign-exchange movements, and acquisition-related payments. The Only About Children acquisition carries $106.5m of deferred consideration payable 18 months after closing; its June 30 present value was $103.5m. The company said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes and insurance coverage cannot be assured. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether enrollment, occupancy, and center staffing improve as expected, and whether wage and provider costs continue to pressure margins.
- The timing and financial effect of government-support program expirations and the extent to which employer subsidies or pricing offset the loss.
- Cash generation and working-capital trends, including the effect of acquisition spending, capital expenditures, and the deferred Only About Children payment.
- Interest-rate exposure as existing caps approach expiration in October 2023 and the company’s ability to maintain covenant compliance.
- The continuing effect of the VAT correction and the drivers of the unusually high first-half effective tax rate.
- GAAP results alongside non-GAAP measures; adjusted EBITDA and adjusted net income are supplemental measures, not substitutes for cash flow or GAAP earnings.