Bright Horizons Family Solutions Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars. Bright Horizons provides center-based child care and early education, back-up care, and educational advisory services, primarily through multi-year employer contracts. It operated 1,083 centers at quarter-end and served more than 1,100 employer clients.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $511.6 million | $471.6 million | $1,541.4 million | $1,424.9 million |
| Gross profit / margin | $125.2 million / 24.5% | $113.0 million / 24.0% | $391.8 million / 25.4% | $352.6 million / 24.7% |
| Operating income / margin | $62.6 million / 12.2% | $55.5 million / 11.8% | $200.4 million / 13.0% | $175.4 million / 12.3% |
| Net income | $41.3 million | $33.6 million | $132.6 million | $111.3 million |
| Diluted EPS | $0.69 | $0.57 | $2.24 | $1.88 |
| Adjusted EBITDA (non-GAAP) | $94.8 million | $85.2 million | $294.5 million | $263.8 million |
- Revenue grew 8% in both comparison periods. Management attributed growth to new and ramping centers, expanded back-up and educational advisory services, and typical annual tuition and price increases of 3%–4%.
- For the nine months, full-service child care revenue rose 6%, back-up care 19%, and educational advisory services 15%. Enrollment in full-service centers increased approximately 5%; unfavorable currency movements reduced that segment’s revenue growth by about 1.5%.
- Gross margin improved about 1 percentage point in both periods, supported by enrollment gains, contributions from new and acquired centers, operating cost management, and growth in other services. Operating margin also increased year over year. Q3 operating income included $0.2 million of acquisition-related transaction costs; nine-month 2019 operating income included $0.6 million.
- Net interest expense declined to $11.0 million for Q3 and $34.6 million for the nine months, primarily reflecting lower average revolver borrowings. Effective tax rates were 20.2% for Q3 and 20.0% for the nine months; stock-based compensation tax benefits reduced tax expense.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $272.4 million, versus $239.7 million in 2018. Investing cash outflow was $126.9 million, mainly for fixed assets, acquisitions and investments; financing cash outflow was $127.2 million.
- Cash and cash equivalents were $48.5 million at September 30, 2019 ($56.9 million including restricted cash). The company reported a $241.9 million working capital deficit, which management said was primarily attributable to operating cash being used for long-term investments and repurchases, and was increased by adoption of the new lease standard.
- Term loan borrowings were $1,048.1 million gross ($1,041.0 million net of financing costs and discount); the $225 million revolving facility had no borrowings at quarter-end. Term loans mature November 2023; the revolver matures July 2022. The company reported compliance with financial covenants.
- A $500 million notional interest-rate swap hedges a portion of variable-rate debt through October 2021. Management estimated the overall weighted-average interest rate at approximately 4.0% for the remainder of 2019.
- ASC 842 adoption added operating lease right-of-use assets and liabilities to the balance sheet. At quarter-end, operating lease liabilities totaled $724.0 million, and additional signed leases not yet commenced carried $119.7 million of fixed payment obligations.
- Management believed operating cash flow, cash balances and revolver availability would be sufficient for planned operations and capital expenditures for at least 12 months under current conditions. It noted significant acquisitions or facility purchases could require additional financing.
Outlook, risks and notable items
- No formal revenue or earnings guidance is provided in the filing. Management expected the 2019 annual effective tax rate to be approximately 20%–22%, subject to equity-transaction timing and the mix of international earnings.
- Management cited seasonality in child care enrollment and back-up care usage, as well as center enrollment and staffing, new-center ramp-up, client launches, contract mix, competition, and general economic conditions as factors that can cause quarterly fluctuations.
- Other exposures include foreign-currency movements, variable interest rates, labor and operating costs, and debt covenants. The company stated that it had no material changes to its previously disclosed risk factors and no off-balance-sheet arrangements.
- During the first nine months, the company acquired two U.S. centers, four Netherlands centers, and a U.K. back-up care provider. Acquisition consideration included contingent payments of up to $20.0 million; the recorded fair-value estimate was $16.6 million and remained subject to measurement-period revision. A $20.1 million U.S. tuition-program acquisition closed after quarter-end.
- The company repurchased 75,501 shares during Q3 and 80,001 shares during the nine months. At quarter-end, $246.6 million remained under its $300 million authorization. Ordinary-course legal matters were not expected by management to have a material adverse effect, although outcomes and insurance coverage are uncertain.
Important facts for investors to verify
- Whether enrollment, pricing, and back-up care utilization can sustain growth while controlling personnel, provider, technology, and new-center ramp-up costs.
- The cash requirements of capital spending, acquisitions, share repurchases, and substantial long-term lease commitments, including leases not yet commenced.
- Debt maturity and covenant capacity, exposure to variable rates beyond the $500 million swap hedge, and the effect of currency movements on international results.
- The assumptions behind acquisition contingent consideration, preliminary purchase-price allocations, and the expected tax rate and stock-based compensation tax benefits.
- How non-GAAP adjusted EBITDA and other adjusted measures reconcile to GAAP results; the filing cautions these measures do not represent cash available for debt service, investment, or other obligations.