Bright Horizons Family Solutions Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with Q1 2019. Amounts are in U.S. dollars. The company provides center-based child care and early education, back-up care, and educational advisory services.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $506.3 million | $501.8 million | Up 1% |
| Gross profit / margin | $108.9 million / 21.5% | $126.9 million / 25.3% | Down $18.1 million |
| Operating income / margin | $43.3 million / 8.5% | $62.9 million / 12.6% | Down $19.6 million |
| Net income | $30.7 million | $42.0 million | Down 27% |
| Diluted EPS | $0.52 | $0.71 | Down 27% |
| Adjusted EBITDA | $81.5 million | $93.8 million | Down 13% |
| Operating cash flow | $64.1 million | $107.0 million | Down $42.9 million |
Revenue by segment was $411.4 million for full-service child care (down 2%), $74.2 million for back-up care (up 15%), and $20.8 million for educational advisory services (up 11%). Higher back-up and advisory revenue, new and ramping centers, acquisitions, and price increases offset the early-quarter effects of center closures. Cost of services increased 6%, and the reported results included a $5.0 million long-lived-asset impairment charge related to COVID-19.
Cash used in investing activities was $13.0 million, versus $60.6 million in Q1 2019; cash used in financing activities was $25.7 million, versus $62.3 million. Cash, cash equivalents and restricted cash totaled $55.4 million at quarter-end, including $49.2 million of unrestricted cash. Working capital was negative $213.0 million.
At March 31, 2020, term-loan principal was $1.043 billion and reported debt carrying value, net of financing costs and discount, was $1.037 billion. There were no revolving-credit borrowings; the facility was then $225 million. Current and long-term operating lease liabilities totaled $808.9 million. The company reported compliance with its financial covenant at quarter-end.
Material changes and unusual items
- COVID-19 closures began in March. About 250 of 1,094 centers remained open at quarter-end, with capacity for approximately 32,000 children; most other centers were temporarily closed. The closures reduced full-service revenue and margins, while increased back-up-care demand supported that segment.
- Foreign-currency translation and interest-rate swap losses contributed to a $43.8 million other comprehensive loss; comprehensive loss was $13.0 million despite positive net income.
- Q1 share repurchases totaled $32.2 million. The company subsequently suspended repurchases in response to the pandemic.
- Reported Q1 effective tax rate was 7.1%, versus 17.5% a year earlier, reflecting, among other items, excess tax benefits from stock-based compensation. Before those benefits, the company said the rates approximated 28% and 26%, respectively.
Outlook, liquidity and risks
- Management expected center closures to continue into Q2 and potentially later periods, with adverse effects on operations. It said the pandemic’s duration, reopening pace, and financial impact could not be reasonably estimated; no quantified full-year guidance was provided.
- Cost and liquidity actions included furloughs, lower discretionary spending, temporary executive and director compensation reductions, and prioritizing operating needs. Management believed cash, operating cash flows, subsequent equity proceeds, and available credit would cover obligations for at least 12 months, based on its assumptions.
- After quarter-end, the company issued 2,138,580 shares at $116.90 per share, receiving $250 million gross proceeds. Credit amendments increased revolving capacity to $385 million in April and $400 million in May and temporarily changed leverage covenant requirements. The company also disclosed higher borrowing spreads and commitment fees under the April amendment.
- Key risks include prolonged closures, delayed or limited reopening, lower enrollment or client demand, staffing constraints, additional health and safety costs, reduced collections, further asset impairments, and the possibility that extended disruption could require additional financing.
Important facts for investors to verify
- Current center operating and reopening levels, enrollment, and the resulting revenue and margin impact.
- Liquidity assumptions and actual use of the $250 million equity proceeds and expanded revolving facility, including covenant compliance.
- Whether back-up-care demand persists and whether full-service operations recover as centers reopen.
- Potential further impairments and the effects of COVID-19 on receivables, collections, and client contracts.
- Comparability of adjusted, non-GAAP measures with GAAP results; Q1 adjusted EBITDA excludes the $5.0 million impairment charge.