Bright Horizons Family Solutions Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Bright Horizons provides employer- and family-focused child care, back-up dependent care, and educational advisory services in the U.S. and internationally.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $433.3 million | $383.9 million | $1,301.0 million | $1,171.3 million |
| Gross profit / margin | $103.2 million / 23.8% | $91.5 million / 23.8% | $322.5 million / 24.8% | $291.6 million / 24.9% |
| Operating income / margin | $45.0 million / 10.4% | $44.7 million / 11.6% | $153.2 million / 11.8% | $149.9 million / 12.8% |
| Net income | $31.1 million | $22.5 million | $105.5 million | $77.6 million |
| Diluted EPS | $0.51 | $0.37 | $1.74 | $1.27 |
- Revenue rose 13% in Q3 and 11% for the nine-month period. Growth reflected new and ramping centers, higher enrollment, tuition increases of 3–4%, and expansion in back-up care and advisory services. Asquith, acquired in November 2016, contributed $23.5 million of Q3 and $69.3 million of nine-month revenue.
- Q3 gross margin was flat year over year; nine-month gross margin was slightly lower. Operating margin declined in both periods as SG&A grew faster than revenue and Q3 included Ireland disposition costs.
- Operating cash flow was $201.2 million for the nine months, versus $165.0 million. Investing cash outflow was $80.6 million, including $63.1 million of fixed-asset purchases and $17.5 million for acquisitions. Financing cash outflow was $95.1 million, including $74.9 million of share repurchases.
Balance sheet, debt, and liquidity
- At September 30, cash was $42.3 million, current assets $195.8 million, and current liabilities $398.4 million; the working-capital deficit was $202.7 million. The company said this deficit reflects use of operating cash for long-term investment and share repurchases.
- Term-loan principal was $1.070 billion and revolving-credit borrowings were $65.5 million. The revolving facility totals $225 million, implying approximately $159.5 million of unused capacity. Cash was $39.2 million of the total held outside the U.S.
- The company reported compliance with its credit-facility financial covenants. Management believed operating cash flow, cash balances, and revolver availability would meet planned operating and capital needs for at least 12 months under current conditions.
Material changes, outlook, and risks
- Reported net income benefited from the prospective adoption of stock-compensation accounting guidance: excess tax benefits reduced tax expense by $3.4 million in Q3 and $21.9 million year to date. A further approximately $7.0 million tax benefit related to the Ireland disposition also reduced Q3 tax expense. The company said the effective tax rate before these items was approximately 36%; its 2017 annual effective-tax-rate estimate was 17–19%, depending on future stock-award tax benefits.
- Bright Horizons sold its remaining three Irish centers, recording a $3.7 million loss in other expenses. It acquired 13 centers in the Netherlands and U.S. during the first nine months. It operated 1,037 centers at quarter-end, up 10% year over year.
- On October 16, 2017, after quarter-end, the company entered into interest-rate swaps covering $500 million of term-loan principal, scheduled to mature in October 2021. The swaps were intended to reduce exposure to variable rates.
- No general revenue or earnings guidance was provided. Management noted seasonal patterns in child-care demand and quarterly variability from enrollment, staffing, center openings and ramp-ups, acquisitions, contract mix, and other factors. It cited ongoing investments in technology, personnel, and new-center growth.
- Key risks include substantial debt and variable interest exposure, execution and integration of acquisitions and new centers, labor and operating-cost pressures, foreign-currency movements, and the possibility that additional financing for significant investments may not be available on reasonable terms. The company said it had no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of earnings growth reflects core operations versus the $21.9 million year-to-date stock-compensation tax benefit and Ireland-related tax benefit.
- Whether revenue and enrollment growth can sustain margins as SG&A, labor, technology, and new-center ramp costs rise.
- Current debt, revolver availability, covenant headroom, and the effect of the post-quarter interest-rate swaps.
- Capital allocation priorities, including share repurchases, acquisitions, and center investment; $207.9 million remained under the repurchase authorization at quarter-end.
- Potential balance-sheet effects of the forthcoming lease-accounting standard; management anticipated a material impact from recognizing long-term leases.