Bright Horizons Family Solutions Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 2, 2015. Bright Horizons provides employer-sponsored child care and early education, back-up dependent care, and educational advisory services. At year-end it operated 884 centers with capacity for approximately 101,000 children.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,353.0 million | $1,218.8 million | Up 11% |
| Gross profit / margin | $313.6 million / 23.2% | $280.9 million / 23.1% | Margin up 0.1 percentage point |
| Income from operations / margin | $146.9 million / 10.9% | $109.0 million / 9.0% | Up 35% |
| Net income | $72.0 million | $12.3 million | Up substantially |
| Diluted EPS | $1.07 | $0.20 | Up |
| Adjusted EBITDA | $238.1 million | $208.5 million | Up 14% |
| Cash from operating activities | $174.3 million | $159.7 million | Up $14.6 million |
Adjusted EBITDA is a non-GAAP measure; the company cautions that it is not a substitute for GAAP results or cash flow and does not reflect debt service, working capital needs, or capital expenditures.
Revenue mix and operating changes
- Full-service center-based care generated $1,156.7 million, or 86% of revenue, up 10%; segment operating income was $92.2 million.
- Back-up dependent care generated $162.9 million, or 12% of revenue, up 13%; segment operating income was $49.3 million.
- Educational advisory services generated $33.5 million, or 2% of revenue, up 37%; segment operating income was $5.4 million.
- Growth reflected new and ramping centers, acquired centers, enrollment gains, annual tuition increases generally of 3% to 4%, and expansion of back-up care and educational advisory services. The 2013 acquisitions contributed approximately $44.7 million of incremental 2014 revenue.
- The company added 33 centers and closed 29, for a net increase of four. It acquired five centers in 2014 for $13.2 million.
Net income comparisons are affected by unusual prior-year items: 2013 included a $63.7 million loss on debt extinguishment, while 2014 included a $40.3 million income tax expense versus a $7.5 million tax benefit in 2013. The 2014 tax expense included recognition of tax benefits related to audit resolutions and statute expirations.
Cash, debt, and liquidity
- Cash and cash equivalents were $87.9 million at year-end, compared with $29.6 million a year earlier. Operating cash flow was $174.3 million; investing activities used $78.0 million and financing activities used $36.4 million.
- Working capital was negative $56.3 million, an improvement from negative $89.9 million in 2013. Management said operations, cash balances, and available revolver capacity were expected to cover planned needs for at least 12 months under current conditions.
- Term-loan principal was $939.2 million; reported debt net of deferred financing costs and discount was $921.2 million. The company drew $165.0 million of incremental term loans in December 2014, primarily for general corporate purposes and share repurchases. The term loans mature in 2020.
- The $100 million revolving facility was undrawn and fully available at year-end. The weighted-average term-loan interest rate was 3.9%; debt is variable-rate. The company estimated that a 100-basis-point increase in rates would raise 2014 interest expense by approximately $8.0 million based on borrowings outstanding.
- 2014 share repurchases totaled $221.6 million, including 4.5 million shares bought in a block transaction. A new $250 million repurchase authorization was approved in February 2015. No cash dividends were paid.
Outlook, risks, and unusual matters
- Management expected approximately 20–25 net new centers in 2015, cash from operations at a level similar to 2014, fixed-asset spending of approximately $80–$90 million, and interest payments of approximately $37 million.
- Principal operating risks include enrollment sensitivity to economic conditions, the ability to hire and retain qualified teachers, wage and benefit inflation, seasonal demand, contract renewals, center ramp-up and acquisition integration, and compliance with child-care licensing and safety requirements.
- Other material risks include variable interest rates, significant leverage and restrictive debt covenants, foreign-exchange exposure, reputational damage or litigation involving child safety, and potential effects of insurance costs or claims. Management reported ordinary-course legal matters and did not expect their resolution to materially affect results; outcomes and insurance coverage remain uncertain.
- Management and the auditor identified a material weakness in IT general controls involving user access and program-change management. Management concluded internal controls over financial reporting and disclosure controls were ineffective at December 31, 2014; Deloitte issued an adverse opinion on internal control, but an unqualified opinion on the financial statements. No restatement resulted. Remediation was underway, with completion targeted by December 31, 2015.
- The Sponsor ceased to be a majority owner in December 2014 but still held approximately 42.2% of common stock at February 11, 2015. The company reported that it was transitioning from controlled-company governance exemptions.
Key facts for investors to verify
- Progress and independent testing of remediation for the IT-controls material weakness, and whether controls become effective as planned.
- Whether enrollment gains, tuition increases, and center utilization can offset teacher compensation and other operating-cost inflation.
- Debt balances, variable-rate exposure, covenant compliance, and the use of borrowings and cash for share repurchases.
- Execution of the 2015 center-growth and capital-spending plans, including returns from acquisitions and ramping centers.
- Quarterly seasonality and the effects of foreign-exchange movements; 2014 included a $23.1 million foreign-currency translation loss in other comprehensive income.