BRIGHT HORIZONS FAMILY SOLUTIONS INC. annual report, FY2020

Bright Horizons Family Solutions Inc. — FY2020 Form 10-K

Business context and reporting period. Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. Bright Horizons provides employer-sponsored child care and early education, back-up care, and educational advisory services. It operated 1,014 centers across North America and Europe, with 910 open at year-end. The business was heavily disrupted by COVID-19, particularly center-based care.

Financial performance and liquidity

Metric	FY2020	FY2019
Revenue	$1,515.1 million	$2,062.0 million
Gross profit / margin	$304.5 million / 20.1%	$522.9 million / 25.4%
Operating income / margin	$53.3 million / 3.5%	$267.8 million / 13.0%
Net income	$27.0 million	$180.4 million
Diluted EPS	$0.45	$3.05
Operating cash flow	$209.6 million	$330.4 million

• Revenue fell 26.5%. Center-based child care revenue declined 38.7% to $1,032.3 million; back-up care grew 31.0% to $388.3 million; educational advisory and other services rose 15.7% to $94.5 million.
• Center-based operations recorded a $155.4 million operating loss, versus $166.0 million operating income in 2019. Back-up care operating income increased to $182.9 million from $80.4 million; educational advisory and other services generated $25.8 million, up from $21.4 million.
• Adjusted EBITDA, a non-GAAP measure, was $224.4 million versus $394.9 million. It includes $34.9 million of add-backs for COVID-related and other specified costs; it should not be treated as cash available for discretionary use.
• Cash and cash equivalents were $384.3 million at year-end, versus $27.9 million a year earlier. Working capital was positive $93.4 million, compared with a $254.4 million deficit.
• Operating cash flow was $209.6 million; investing cash outflow was $83.8 million; financing cash inflow was $229.0 million, including $249.8 million of net proceeds from an April stock issuance.
• Debt totaled $1.031 billion, with no revolver borrowings and $400 million of revolving capacity available. The term loan matures in November 2023; the company reported compliance with its financial covenant at year-end. Cash interest paid was $35.3 million.
• Operating lease liabilities were $816.9 million. Contractual obligations disclosed total $2.216 billion, including term-loan principal, estimated interest, and operating leases.

Material changes and unusual items

• COVID-related center closures and lower enrollment drove the sharp fall in center revenue and profitability. Tuition revenue decreased 45%, with enrollment down 43% year over year.
• The company opened 18 centers and permanently closed 88 during 2020; it also divested its two-center Canadian business. At year-end, 104 centers remained closed temporarily.
• Government support programs reduced cost of services by $83.5 million in 2020. The company also deferred $20.4 million in payroll taxes and had $7.7 million in deferred lease payments.
• Impairment losses totaled $28.3 million, including $26.2 million associated with child care centers and $2.1 million on a back-up care equity investment. Center closure costs were $6.6 million.
• The income tax benefit was $11.3 million, versus $42.3 million of tax expense in 2019; the unusually low effective rate reflected stock-based compensation tax benefits and other discrete items.
• Fourth-quarter revenue was $377.1 million, operating income $7.9 million, net income $2.6 million, and diluted EPS $0.04. In fourth-quarter 2019, the corresponding amounts were $520.6 million, $67.4 million, $47.8 million, and $0.81.

Outlook, risks, and contingencies

• Management expects COVID-19 to continue adversely affecting results in 2021. It expects enrollment recovery to continue, but provides no specific revenue or earnings guidance and cannot predict when reopened centers will return to typical enrollment.
• Management expects 2021 interest payments of approximately $36 million to $38 million. It believes cash, operating cash flows, and available revolver capacity can fund obligations for at least 12 months, while warning prolonged disruption could require additional financing.
• Key risks include continued center closures or slow enrollment recovery; a lasting shift to remote work; staffing shortages and wage inflation; reduced client demand; health and safety incidents; and execution of acquisitions and growth plans. Back-up care demand surged during the pandemic, but management cautions that this trend may not persist.
• The company is subject to a UK governmental investigation and potential health and safety charges concerning a July 2019 nursery incident. It cannot reasonably estimate a possible loss range; management does not expect a material effect on consolidated financial position. Other ordinary-course legal matters are also disclosed.
• Variable-rate debt, LIBOR transition, foreign exchange, extensive lease commitments, and restrictive debt covenants are additional financial risks. The company paid no common-stock dividends and has no stated current intention to begin regular dividends.

Important facts for investors to verify

• Current center openings, enrollment, occupancy, and the pace of recovery versus pre-pandemic levels; also whether additional centers are permanently closed.
• Whether back-up care growth and segment profitability are sustainable as service use normalizes, and how much results depend on government support.
• Liquidity and covenant headroom under continued disruption, upcoming debt maturities, interest-rate exposure, and the scale of lease commitments.
• Potential liabilities or reputational impact from the UK investigation and other health, safety, insurance, or regulatory matters.
• Reconciliation and comparability of non-GAAP adjusted results, including the nature and recurrence of excluded costs and the unusually favorable 2020 tax result.