Bright Horizons Family Solutions Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparison is with the same periods in 2016. The company provides employer- and family-focused child care, back-up dependent care, and education advisory services in the U.S. and several international markets. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Revenue | $445.5 | $402.1 | $867.7 | $787.4 |
| Gross profit | $114.3 | $104.4 | $219.3 | $200.2 |
| Gross margin | 25.7% | 26.0% | 25.3% | 25.4% |
| Operating income | $56.8 | $56.6 | $108.2 | $105.2 |
| Operating margin | 12.7% | 14.1% | 12.5% | 13.3% |
| Net income | $33.0 | $30.4 | $74.4 | $55.1 |
| Diluted EPS | $0.54 | $0.50 | $1.22 | $0.90 |
| Adjusted EBITDA | $86.5 | $80.8 | $164.9 | $153.2 |
- Q2 revenue grew 11%; H1 revenue grew 10%. Management attributed growth to new and ramping centers, enrollment gains, annual tuition increases of about 3–4%, and expanded back-up care and education advisory services. Asquith, acquired in November 2016, contributed $24.0 million of Q2 and $45.8 million of H1 revenue.
- Gross profit increased, but gross margin was slightly lower year over year. Operating margin declined, reflecting higher SG&A and amortization; costs included $1.9 million related to the May credit amendment and a secondary offering. Management also cited wage, technology, integration, and new-center ramp-up costs.
- Net income growth was substantially affected by the adoption of stock-compensation accounting guidance: excess tax benefits reduced tax expense by $3.4 million in Q2 and $18.5 million in H1. The company said the effective tax rate would have been about 36% in both 2017 periods without these benefits; the reported H1 rate was 14.3%.
Cash flow, debt and liquidity
- H1 cash from operating activities was $167.6 million, up from $146.9 million. Investing used $59.2 million, including $42.2 million of net fixed-asset purchases and $17.0 million for acquisitions. Financing used $89.9 million, including $73.2 million of share repurchases and $23.3 million of taxes on net share settlements.
- Cash was $34.3 million at June 30, 2017, compared with $14.6 million at year-end 2016; $33.0 million was held in foreign jurisdictions. Working capital deficit was $229.2 million.
- Term-loan principal was $1.072 billion and revolver borrowings were $67.0 million under a $225 million facility. The term loans mature in November 2023; the revolver maturity was extended to July 2022. The May 2017 amendment reduced applicable interest rates. Borrowings carry variable rates, and the company reported compliance with financial covenants.
- The company said operating cash flows, existing cash and revolver availability should be adequate for planned operating and capital needs for at least the next 12 months under current conditions. Significant acquisitions or investments beyond existing borrowing capacity could require additional financing.
Outlook, commentary and risks
- Management estimated a 2017 annual effective tax rate of approximately 23–25%, dependent on the timing and amount of excess tax benefits from equity awards; it expected a further $3–4 million of such benefits for the remainder of 2017. The filing provides no specific revenue or earnings guidance.
- Results are seasonal: child-care and school-service demand typically declines during summer, while back-up care use can rise when schools are out. Enrollment, staffing, new-center ramp-up, acquisition timing, contract mix, and economic conditions can also cause quarterly variability.
- Foreign currency movements reduced full-service segment revenue growth by about 2% in Q2 and H1, according to management. The company has variable-rate debt and does not currently use derivatives to hedge market risk.
- Management reported no material change in previously disclosed risk factors and no off-balance-sheet arrangements. Ordinary-course legal claims remain possible; management did not expect their resolution to materially affect results, but noted insurance may not cover all liabilities.
- The company anticipated a material balance-sheet effect from adopting lease accounting (ASC 842), as long-term leases would be capitalized. It was evaluating the impact of the new revenue-recognition standard and did not then expect a material impact on consolidated results.
Most important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the $18.5 million H1 stock-compensation tax benefit, and how recurring those tax benefits may be.
- Whether revenue growth and enrollment gains translate into improved operating margins as new centers ramp and labor, technology, and occupancy costs rise.
- Debt service capacity, variable-rate exposure, covenant headroom, and remaining revolver availability alongside the working capital deficit.
- The contribution and integration performance of Asquith and other acquired centers, plus the final purchase-price allocations for acquisitions still under review.
- The effects of seasonality, foreign exchange, share repurchases, and forthcoming lease-accounting adoption on future cash flows and reported results.