Bright Horizons Family Solutions Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone Q4 filing; quarterly figures are included below where relevant. Amounts are in U.S. dollars.
Business context
Bright Horizons provides employer-sponsored child care and early education, back-up dependent care, and educational advisory services. At year-end, it operated 932 centers with capacity for approximately 107,000 children and served more than 1,000 employer clients. Full-service center care accounted for 85% of FY 2015 revenue; back-up care 12%; and educational advisory services 3%.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $1,458.4 million | $1,353.0 million | +8% |
| Gross profit / margin | $357.8 million / 24.5% | $313.6 million / 23.2% | +14%; margin +1.3 percentage points |
| Income from operations / margin | $181.6 million / 12.4% | $146.9 million / 10.9% | +24% |
| Net income | $93.9 million | $72.0 million | +30% |
| Diluted EPS | $1.50 | $1.07 | +40% |
| Adjusted EBITDA (non-GAAP) | $273.1 million | $238.1 million | +15% |
- Revenue growth reflected new, ramping and acquired centers, 3%–4% annual tuition increases, and expanded back-up care and advisory services; foreign currency translation partly offset growth.
- Operating cash flow was $170.1 million versus $174.3 million. Investing cash outflow was $155.4 million, including $77.6 million for acquisitions and $77.8 million in fixed-asset purchases. Financing cash outflow was $90.6 million.
- Cash fell to $11.5 million from $87.9 million. Working capital deficit was $152.6 million, compared with $56.3 million a year earlier.
- At December 31, gross term-loan borrowings were $929.7 million and revolver borrowings were $24.0 million; the balance-sheet carrying amount of debt, net of financing costs and discount, was $915.2 million, plus the revolver. The term loans mature in 2020. The company reported covenant compliance.
- Management reported interest payments of $38.1 million in 2015. Operating leases represented $843.0 million of future minimum payments.
- Q4 2015: Revenue was $371.6 million, operating income $44.9 million, net income $23.9 million, and diluted EPS $0.39. Q4 2014 revenue was $337.8 million, operating income $37.3 million, net income $18.9 million, and diluted EPS $0.28.
Material changes versus prior year
- Gross and operating margins improved, supported by enrollment gains, pricing, cost management, and growth in higher-contribution service lines.
- Interest expense increased: management attributed this to $165 million of additional term loans issued in December 2014 and 2015 revolver borrowings.
- Acquisitions included Hildebrandt Learning Centers (40 U.S. centers) and Active Learning Childcare (nine U.K. centers); together they contributed approximately $29.6 million of 2015 revenue. The company acquired 57 centers during 2015 and ended the year with 48 more centers net of openings and closures.
- Share repurchases totaled $128.1 million for 2.2 million shares in 2015, following $221.6 million in 2014 repurchases.
- Cash declined substantially, while the working capital deficit widened. European currency translation reduced reported results and contributed to a $17.6 million foreign-currency translation loss in other comprehensive income.
Outlook, risks, and unusual items
- Management expected approximately 25 net new centers in 2016, about $200 million of operating cash flow, $80–$90 million of fixed-asset additions, and approximately $38 million of interest payments. No specific revenue or earnings guidance was provided.
- Management identified enrollment growth, annual tuition increases of 3%–4%, expanded services, acquisition integration, and improvement of underperforming centers as important to continued operating-income growth. Results are seasonal, with child-care demand typically lower in summer.
- Key risks include economic weakness or employer benefit cutbacks, hiring and retaining qualified teachers, wage inflation and the ability to pass costs through, high variable-rate debt, foreign exchange exposure, regulation and licensing, litigation or safety incidents, and acquisition and integration risks.
- Material internal-control weakness: Management and Deloitte concluded internal control over financial reporting was ineffective at year-end because of IT general-control deficiencies in user access and program change management. The financial-statement audit opinion was unqualified, but Deloitte issued an adverse opinion on internal controls. Management said remediation was ongoing and expected completion by December 31, 2016, subject to effective testing.
- Ordinary-course legal matters were not expected by management to have a material financial effect, although outcomes and insurance coverage cannot be assured. No goodwill or intangible-asset impairment was reported in 2015.
- On January 26, 2016, the revolving facility was increased from $100 million to $225 million, its maturity extended to July 2019, and its pricing modified.
Important facts for investors to verify
- Progress and independent validation of remediation of the IT-related material weakness, and whether disclosure controls become effective.
- Enrollment, occupancy and profitability trends at mature and ramping centers, including the effect of summer seasonality and the pace of new-center openings.
- Debt balances, interest-rate exposure, covenant headroom, liquidity, and the effect of the January 2016 credit-facility amendment.
- Cash conversion and the funding of acquisitions, capital expenditures, and share repurchases, given low year-end cash and the larger working capital deficit.
- Acquisition integration and returns, including the performance of the 2015 acquisitions and any related goodwill or intangible-asset risks.
- Interpret non-GAAP adjusted EBITDA alongside GAAP results and cash flow; the company cautions that adjusted measures are not cash available for debt service or discretionary investment.