Bright Horizons Family Solutions Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Bright Horizons provides employer-sponsored child care and early education, back-up dependent care, and educational advisory services. It operated 1,035 centers in North America and Europe, with capacity for approximately 115,000 children. Full-service care generated 84% of FY2016 revenue, back-up care 13%, and educational advisory services 3%. The company reported more than 1,100 employer client relationships.
Key financial results
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,569.8 million | $1,458.4 million | +8% |
| Gross profit / margin | $390.8 million / 24.9% | $357.8 million / 24.5% | +9%; margin +0.4 percentage points |
| Operating income / margin | $197.2 million / 12.6% | $181.6 million / 12.4% | +9%; margin +0.2 points |
| Net income / diluted EPS | $94.8 million / $1.55 | $93.9 million / $1.50 | Net income +1%; EPS +3% |
| Adjusted EBITDA (non-GAAP) | $299.2 million / 19.1% | $273.1 million / 18.7% | +10% |
| Cash from operating activities | $213.3 million | $170.1 million | +25% |
Fourth-quarter revenue was $398.5 million versus $371.6 million in Q4 2015. Operating income was $47.3 million versus $44.9 million; net income was $17.1 million versus $23.9 million, and diluted EPS was $0.28 versus $0.39. The Q4 2016 net result included the annual debt-extinguishment charge.
FY2016 revenue growth reflected enrollment gains, annual tuition increases typically of 3%–4%, new and acquired centers, and expanded back-up care and advisory services. Full-service enrollment increased 7%; lower foreign exchange rates reduced growth in that segment by approximately 2%. Back-up care revenue grew 10%, and educational advisory revenue grew 20%. The consolidated gross margin improved slightly; net income grew more slowly than operating income, in part because of refinancing costs and higher debt.
Liquidity, debt and capital allocation
- Cash at year-end was $14.6 million. Working capital was negative $233.2 million, compared with a deficit of $152.6 million at year-end 2015.
- Total debt, including current maturities and revolving borrowings, was approximately $1.141 billion, up from $939.2 million. Net debt was approximately $1.126 billion.
- In November 2016, the company refinanced its term loans into a seven-year facility maturing November 2023. It recorded an $11.1 million loss on extinguishment of debt. The $225 million revolver had $76 million drawn and $149 million available at year-end. The company reported compliance with its financial covenants.
- Debt is variable-rate and secured by substantially all assets of U.S. subsidiaries. Management estimated a 100-basis-point rate increase on 2016 borrowings would have increased annual interest expense by about $9.9 million.
- Investing cash outflow was $302.8 million, including $228.7 million for acquisitions and $75.3 million for fixed-asset purchases. Financing cash inflow was $93.8 million, reflecting refinancing and revolver activity, partly offset by $112.8 million of share repurchases.
- The company authorized a $300 million repurchase program; $282.8 million remained available at year-end. It paid no cash dividends and said it had no current plan to pay regular dividends.
Outlook, risks and notable items
- Management expected approximately 30 net new centers in 2017, about $225 million of operating cash flow, and $90–$100 million of fixed-asset spending. It expected 2017 interest payments of approximately $40 million. These are management expectations, not guarantees.
- Growth depends on enrollment and center utilization, tuition increases keeping pace with wage and benefit costs, employer contract renewals, successful acquisitions, and the ability to recruit and retain qualified teachers. Personnel costs are the largest center expense.
- Key risks include economic weakness reducing enrollment or employer sponsorship; labor shortages and wage inflation; competition and pricing pressure; regulatory and licensing requirements; child safety incidents and reputational damage; litigation and insurance availability or cost; data-security breaches; foreign-currency exposure; and the company’s substantial variable-rate debt and restrictive covenants.
- International operations contributed 18.6% of revenue. Management estimated an adverse 10% currency movement across relevant currencies would reduce 2016 pretax earnings by approximately $3 million. Foreign-currency translation reduced equity by $50.2 million in 2016.
- The Asquith acquisition added 90 UK centers for $206.1 million in November 2016; it contributed $11.3 million of reported 2016 revenue. Purchase accounting remained preliminary. Total year-end goodwill was $1.268 billion; no goodwill or intangible impairment was recorded.
- Operating leases represented substantial commitments: $899.3 million of future minimum lease payments disclosed at year-end. Management stated that pending ordinary-course litigation was not expected to have a material effect, while noting outcomes and insurance coverage could not be assured.
- The company reported effective disclosure controls and internal control over financial reporting. A previously reported IT general-controls material weakness was reported as remediated by year-end; the auditor gave unqualified opinions on the financial statements and internal controls. The internal-control audit excluded acquired Asquith.
Important facts for investors to verify
- Whether enrollment, utilization, pricing, and teacher staffing support the projected 2017 center growth and cash generation.
- Debt repayment capacity and exposure to variable interest rates, covenant restrictions, and the working-capital deficit.
- Integration and final purchase accounting for Asquith and other acquisitions, including the expected returns on acquisition spending.
- Whether repurchases, lease obligations, and planned capital spending remain consistent with liquidity and debt-reduction priorities.
- The sustainability of adjusted EBITDA growth alongside GAAP net income, including the effect of acquisition, refinancing, and other excluded costs.