Bright Horizons Family Solutions Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Bright Horizons provides employer-sponsored child care and early education, back-up care, and educational advisory services. At year-end it operated 1,082 centers serving approximately 120,000 children, with more than 1,100 employer client relationships.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $1,903.2 million | $1,740.9 million | +9% |
| Gross profit / margin | $473.3 million / 24.9% | $430.6 million / 24.7% | Margin +0.2 percentage points |
| Income from operations / margin | $239.1 million / 12.6% | $205.4 million / 11.8% | +16% |
| Net income | $158.0 million | $157.0 million | +1% |
| Diluted EPS | $2.66 | $2.59 | +3% |
| Adjusted EBITDA (non-GAAP) | $357.1 million | $323.6 million | +10% |
| Cash provided by operating activities | $294.7 million | $248.2 million | +19% |
Revenue growth reflected enrollment gains, new and ramping centers, annual tuition increases typically of 3%–4%, and expansion in back-up care and educational advisory services. Overall center enrollment increased approximately 5%. Segment revenue was $1,586.3 million for full-service child care, $245.5 million for back-up care, and $71.4 million for educational advisory services; the latter two grew 10% and 21%, respectively. Operating margin improved as revenue growth and cost management outpaced overhead growth.
Net income was nearly flat despite higher operating income, in part because the effective tax rate rose to 17.5% from 2.7% in 2017. The prior-year rate benefited from Tax Act accounting and other discrete tax benefits; stock-based compensation tax benefits reduced 2018 tax expense by $12.1 million (versus $26.5 million in 2017). Adjusted EBITDA and other adjusted measures are non-GAAP and should be considered alongside GAAP results.
Fourth-quarter results
For Q4 2018, revenue was $478.2 million versus $439.9 million in Q4 2017; operating income was $63.7 million versus $52.3 million. Net income was $46.7 million versus $51.4 million, and diluted EPS was $0.79 versus $0.86. The prior-year quarter included a $22.3 million tax benefit from the Tax Act, which affects comparability.
Cash, debt, and liquidity
- Year-end cash and cash equivalents were $15.5 million; reported total debt, including current maturities, was $1,165.8 million. The revolving facility had $118.2 million drawn and $106.8 million available.
- Working capital deficit was $289.9 million, compared with $268.2 million a year earlier. Management expects operating cash flows, cash balances, and available revolver capacity to cover planned needs for at least 12 months under current conditions.
- Investing activities used $158.5 million, including $67.1 million for acquisitions and $92.5 million for fixed-asset purchases. Financing activities used $134.2 million, primarily due to $126.7 million of share repurchases and debt payments.
- Term loans mature in November 2023, with $1,013.2 million of principal scheduled for 2023. Debt is principally variable-rate; $500 million of term-loan exposure was covered by swaps. The company reported compliance with financial covenants at year-end.
Outlook, commentary, and risks
- Management expected approximately 25 net new centers in 2019, operating cash flow of $300–$325 million, fixed-asset spending of $90–$100 million, and interest payments of approximately $46–$48 million.
- Growth priorities include enrollment and utilization, pricing to offset wage and benefit increases, expanding employer relationships and services, and selective acquisitions. Management cited economic conditions, client budgets, labor markets, enrollment, and wage rates as key variables.
- Material risks include hiring and retaining qualified teachers while maintaining mandated staffing ratios; child safety incidents and reputational harm; employer contract non-renewals and economic weakness; wage inflation and competition; substantial debt, floating interest rates, and restrictive covenants; acquisition integration; cybersecurity and privacy; regulatory compliance and litigation; foreign exchange exposure and Brexit uncertainty; and seasonality.
- Operating leases totaled approximately $996.6 million in future minimum payments. Adoption of the new lease accounting standard in 2019 was expected to materially increase reported assets and liabilities, but not materially affect earnings or cash flows.
- The company repurchased $126.7 million of shares in 2018, with $259.0 million remaining under its authorization. It paid no dividends and did not intend to pay regular dividends at that time.
- Auditor Deloitte & Touche issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether enrollment, center utilization, and annual price increases continue to offset teacher wage, benefit, and provider costs without pressuring margins.
- Cash conversion and the capacity to fund acquisitions, capital spending, debt service, and share repurchases given low cash balances and the working capital deficit.
- Debt maturity, covenant headroom, variable-rate exposure, and the actual effect of lease capitalization on leverage and liquidity measures.
- The sustainability of reported earnings and tax rates, separating recurring operating performance from Tax Act effects and stock-based compensation tax benefits.
- Acquisition returns and integration, particularly given $60.3 million of goodwill recorded for 2018 acquisitions and the company’s continuing acquisition strategy.