Bright Horizons Family Solutions Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial amounts are in U.S. dollars; millions unless stated otherwise. The company provides workplace child care, education, backup dependent care and related family services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $310.8 | $271.5 | $590.9 | $529.6 |
| Gross profit / margin | $75.4 / 24.3% | $64.6 / 23.8% | $141.2 / 23.9% | $122.6 / 23.1% |
| Operating income / margin | $35.4 / 11.4% | $16.1 / 5.9% | $50.8 / 8.6% | $42.2 / 7.9% |
| Net income (loss) | $24.5 | ($1.9) | ($26.3) | $1.7 |
| Adjusted EBITDA (non-GAAP) | $56.7 | $47.9 | $105.2 | $89.5 |
- Q2 revenue rose 14.5%; management attributed growth to new and ramping centers, acquisitions, backup-care growth and typical annual tuition increases of 3%–4%. The company operated 830 centers, versus 773 a year earlier.
- First-half revenue rose 11.6%. Gross margin improved in both comparison periods, which management linked to enrollment growth, ramping centers and backup-care revenue.
- Q2 net income attributable to the company was $24.6 million, or $0.38 basic and $0.37 diluted per common share. First-half loss attributable to the company was $26.2 million, or $0.43 per share, primarily reflecting a $63.7 million debt-extinguishment loss.
- Operating cash flow for the first half was $98.4 million, versus $90.4 million in 2012. Investing cash outflow was $103.9 million, including $64.2 million for the Kidsunlimited acquisition and $39.7 million of fixed-asset purchases. Cash at June 30 was $63.0 million, up from $34.1 million at year-end.
- At June 30, gross borrowings were $786.1 million; reported debt carrying value was $766.7 million after deferred financing costs and original issue discount. Long-term debt was $758.8 million. Cash was $63.0 million and the $100 million revolving facility was undrawn.
- Working capital was negative $72.1 million, compared with a $65.9 million deficit at December 31, 2012. Total assets were $2.03 billion and total liabilities were $1.21 billion.
Material changes and unusual items
- On January 30, the company completed its IPO, issuing 11.6 million shares and raising $234.9 million net of offering expenses and underwriting discounts. Proceeds, together with new term-loan proceeds, funded refinancing and debt repayment. A June secondary offering by existing shareholders generated no proceeds for the company.
- The January refinancing replaced prior borrowings with a $790 million secured term loan and a $100 million revolver. The term loan matures in 2020; quarterly principal payments began in March 2013. Management reported the weighted-average interest rate declined from about 8.5% at December 2012 to 4.1% at June 2013. The refinancing produced the $63.7 million extinguishment loss.
- The first-half results included a $7.5 million fee to terminate the Bain Capital management agreement, $5.0 million of IPO-related stock compensation, $0.6 million of secondary-offering costs and $1.8 million of acquisition costs. The prior-year quarter included $15.1 million of compensation expense related to modified and immediately vested stock awards, affecting year-over-year comparisons.
- Kidsunlimited, an operator of 64 UK nurseries, was acquired in April for $69.1 million. It contributed $16.6 million of revenue and $0.7 million of net income in the first half. On July 22, after quarter-end, the company acquired Children’s Choice Learning Centers for $53.0 million; detailed purchase accounting was not yet complete.
- The Class L shares converted into common stock in January, and the IPO materially increased shares outstanding and stockholders’ equity. Comparisons of per-share results with 2012 are affected by the conversion and share issuance.
Outlook, liquidity and risks
- No numerical earnings or revenue guidance is provided. Management expects positive operating cash flow and believes cash, operating funds and available revolver capacity will be adequate for planned operations and capital needs for at least 12 months under current conditions. Significant acquisitions or facility investments could require additional financing, which may not be available on reasonable terms or at all.
- The company reported compliance with financial covenants at June 30. The credit agreement includes restrictions on additional debt, investments and acquisitions, dividends, asset sales and other activities; its revolving-facility leverage covenant applies when specified borrowing thresholds are exceeded.
- Management identifies seasonality, enrollment and staffing changes, center-opening and acquisition timing, sponsor relationships, cost increases, competition, regulation, litigation, insurance, data security, indebtedness and its covenants, and the ability to recruit and retain qualified staff as relevant risks. Demand for child care generally declines during summer months.
- Ordinary-course legal matters were not expected by management to have a material effect, though outcomes and insurance coverage cannot be assured. Self-insured medical and workers’ compensation claims and licensing requirements may expose the company to additional costs. No material change to the previously reported risk factors was disclosed.
Important facts for investors to verify
- Whether enrollment, tuition increases and acquired-center contributions continue to support revenue and margin growth, and how much growth is organic.
- The sustainability of operating cash flow after center investment, acquisitions, interest and scheduled debt payments; also monitor the working-capital deficit and revolver availability.
- The impact of the refinancing on ongoing interest expense, debt reduction and covenant headroom, and the implications of the term loan’s substantial principal due after 2017.
- How the Children’s Choice acquisition affects liquidity, integration costs, purchase accounting and future results.
- How GAAP performance compares with management’s adjusted non-GAAP measures, including the recurring nature of costs excluded from those measures.