Bright Horizons Family Solutions Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated. Bright Horizons provides child care, early education, back-up dependent care and related workplace and family services in the U.S. and several international markets.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $280.1 | $258.1 |
| Gross profit / margin | $65.8 / 23.5% | $58.0 / 22.5% |
| Operating income / margin | $15.4 / 5.5% | $26.1 / 10.1% |
| Net income (loss) | $(50.8) | $3.6 |
| Adjusted EBITDA (non-GAAP) | $48.5 | $41.6 |
| Adjusted net income (non-GAAP) | $15.6 | $8.4 |
| Cash provided by operating activities | $52.3 | $38.1 |
| Capital expenditures | $22.2 | $12.9 |
Revenue rose 8.5%, reflecting new and ramping centers, expanded back-up care sales, annual tuition increases of 3%–4%, and contribution from the 27-center UK acquisition completed in 2012. The company operated 773 centers versus 743 a year earlier. Gross margin improved with enrollment growth and contributions from newer centers and back-up services.
SG&A increased to $43.6 million from $25.4 million, including a $7.5 million fee to terminate the Bain Capital management agreement, about $5.0 million of performance-related stock compensation, and $1.5 million in costs for the subsequent kidsunlimited acquisition. Operating income fell 40.9%; excluding the identified offering-related and acquisition costs, adjusted operating income was $29.4 million versus $26.1 million. Interest expense declined to $13.3 million from $19.9 million. The reported net loss principally reflected a $63.7 million debt-extinguishment loss from refinancing.
Cash, debt and liquidity
Cash and cash equivalents were $96.7 million at March 31, 2013, compared with $34.1 million at December 31, 2012. Total assets were $1.98 billion. Gross borrowings were $788.0 million, compared with $928.3 million at year-end; debt carrying value after financing costs and discount was $767.9 million. The company had no borrowings under its $100 million revolving facility. Working capital deficit narrowed to $19.3 million from $65.9 million.
Operating cash flow was $52.3 million; investing cash outflow was $22.2 million, all for fixed-asset purchases. Financing cash flow was $33.3 million, reflecting the IPO and refinancing transactions. In January, the company completed a $234.9 million net IPO and entered into $890 million of secured credit facilities, including a $790 million term loan and a $100 million revolver. The refinancing reduced the stated weighted-average interest rate from about 8.5% at year-end 2012 to 4.0% at March 31, 2013. The term loan matures in 2020, with quarterly principal payments; $750.5 million of scheduled principal is due thereafter, primarily at maturity. The credit agreement includes restrictive covenants and a leverage maintenance test applicable under specified revolver usage conditions.
Material developments, outlook and risks
- IPO and capital structure: The IPO, conversion of Class L shares and refinancing substantially changed the company’s equity and debt structure during the quarter.
- Subsequent acquisition: On April 10, 2013, Bright Horizons acquired UK nursery operator kidsunlimited, with 64 nurseries, for £45.0 million subject to adjustments. It was funded from cash on hand; purchase accounting and pro forma details were not yet available.
- Liquidity outlook: Management expected positive operating cash flow and believed cash, operating funds and available revolver capacity would be adequate for planned operations and capital spending for at least 12 months under current conditions. Significant additional acquisitions or facility investments could require financing that may not be available on acceptable terms.
- No specific earnings guidance: The filing provides no numerical forward earnings or revenue guidance. Management notes that results fluctuate with seasonality, enrollment and staffing, center openings and ramp-up, acquisitions, sponsor payments and economic conditions.
- Principal risks: Demand for care services, recruitment and retention of qualified teachers, substantial debt and covenant restrictions, acquisition execution, cost recovery, employer-sponsor relationships, competition, regulation and licensing, insurance, litigation, data security, and health or other catastrophic events. Child-care demand generally declines during summer months; back-up care use and related costs can rise during school breaks and holidays.
- Contingencies and unusual items: Management did not expect ordinary-course litigation to materially affect results, but noted insurance may not cover all claims. Self-insured medical and workers’ compensation claims and regulatory compliance may create exposure. UK tax authorities had an ongoing inquiry for 2009–2011; the filing cites $7.4 million of unrecognized tax benefits and $2.6 million of accrued interest and penalties. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor facts to verify
- Whether operating and margin trends persist after the quarter’s one-time IPO, termination, stock-compensation and acquisition costs; assess non-GAAP adjustments alongside GAAP results.
- The cash and debt position after funding the kidsunlimited acquisition, and the ongoing ability to meet principal, interest and covenant requirements.
- Integration and performance of acquired UK centers, including final purchase accounting and any associated risks or costs.
- Enrollment, staffing, center ramp-up, seasonal patterns and the ability to pass through wage, occupancy and other cost increases.
- Potential outcomes of the UK tax inquiry, insurance claims and licensing or regulatory matters.