Bright Horizons Family Solutions Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company provides center-based child care and early education, back-up care, and workforce education services. Results were substantially affected by the COVID-19 pandemic.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $337.9 million | $511.6 million | $1,138.0 million | $1,541.4 million |
| Gross profit / margin | $55.2 million / 16.3% | $125.2 million / 24.5% | $229.3 million / 20.1% | $391.8 million / 25.4% |
| Operating income (loss) | $(5.9) million | $62.6 million | $45.5 million | $200.4 million |
| Net income (loss) | $(6.7) million | $41.3 million | $24.4 million | $132.6 million |
| Adjusted EBITDA (non-GAAP) | $30.1 million | $94.8 million | $171.6 million | $294.5 million |
Q3 revenue declined 34% year over year; nine-month revenue declined 26%. Center-based child care drove the contraction: segment revenue fell 46% in Q3 and 39% year to date. Back-up care revenue increased 16% in Q3 and 41% year to date, while educational advisory and other services rose 19% and 12%, respectively. Q3 basic and diluted loss per share was $0.11; nine-month diluted EPS was $0.41 versus $2.24 in 2019.
Nine-month operating cash flow was $169.9 million, down from $272.4 million. Investing cash outflow was $48.5 million versus $126.9 million; financing provided $223.4 million versus a $127.2 million outflow, principally reflecting the stock offering. Cash, cash equivalents and restricted cash totaled $376.2 million at September 30, including $365.3 million unrestricted.
Balance sheet and liquidity
- Long-term debt, net of financing costs, was $1.033 billion; no revolving-facility borrowings were outstanding. The $400 million revolver was available, and the company reported compliance with its financial covenant.
- Working capital was $110.7 million, compared with a $254.4 million deficit at December 31, 2019. Operating lease liabilities totaled $822.1 million.
- The company raised $249.8 million net through an April 2020 common-stock issuance. It stated that available cash, operating cash flows and revolver capacity should fund obligations for at least 12 months, based on its assumptions about the pandemic.
Material changes and unusual items
- As of quarter-end, approximately 900 of 1,026 centers were open, with capacity to serve about 115,000 children. The company reopened many centers but reported enrollment well below pre-pandemic levels. It added five centers and permanently closed 55 during Q3; it reported 58 net center reductions in 2020. It also divested its two Canadian centers.
- Government assistance reduced cost of services by $20.3 million in Q3 and $61.5 million year to date. The company also reported $16.0 million due from assistance programs and payroll tax deferrals.
- Year-to-date impairment charges included $18.6 million on long-lived center assets and $2.1 million on an equity investment. The company said goodwill and indefinite-lived intangible assets did not require an interim impairment analysis as of September 30.
- The company suspended share repurchases during the pandemic; $194.9 million remained under its authorization. It had repurchased $32.2 million of shares earlier in 2020 before the suspension.
- The effective tax rate was unusually sensitive to income estimates and discrete items. The nine-month reported tax benefit was $7.5 million, including $10.6 million of tax benefit from stock-based compensation.
Outlook, commentary and risks
Management expected COVID-19 to adversely affect results for the remainder of 2020 and into 2021. It anticipated lower Q4 revenue year over year in both center-based child care and back-up care, and said enrollment recovery could extend through the remainder of 2020 and throughout 2021. It cautioned that reopening pace, enrollment, center operations, demand and government actions remained uncertain; some centers might not reopen or could close permanently. Further impairments and financing needs were also possible if disruption persisted. The company used furloughs, cost controls, lease and vendor payment negotiations, government programs, expanded revolver capacity and equity proceeds to support liquidity. Legal matters were described as ordinary-course claims, with no expected material adverse effect, subject to uncertainty and insurance limitations.
Important facts for investors to verify
- Center reopening, enrollment recovery, permanent closures and the ongoing effect of COVID-19 on revenue and margins.
- How much reported cost relief depended on government assistance, and whether that support continues.
- Liquidity and covenant headroom under the amended credit agreement, including the transition to tighter leverage requirements beginning in 2021.
- Debt service, variable-rate exposure, and the effect of interest-rate swaps and caps; management estimated $5.8 million of pre-tax hedge losses would be reclassified to interest expense over the next 12 months.
- Non-GAAP adjusted EBITDA excludes specified items, including pandemic-related impairment and closure costs; compare it with GAAP results and cash flows.