Business context and reporting period
Bright Horizons Family Solutions Inc. provides center-based child care and early education, back-up care, and workforce education services, primarily through employer contracts. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. The company operated 1,063 centers and served more than 1,400 employer clients.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $645.8 | $540.2 | $1,802.6 | $1,491.0 |
| Gross profit / margin | $157.6 / 24.4% | $128.8 / 23.8% | $415.8 / 23.1% | $367.4 / 24.6% |
| Operating income / margin | $66.8 / 10.3% | $39.0 / 7.2% | $143.0 / 7.9% | $118.0 / 7.9% |
| Net income | $40.0 | $18.2 | $68.7 | $62.6 |
| Diluted EPS | $0.69 | $0.31 | $1.18 | $1.06 |
| Adjusted EBITDA (non-GAAP) | $101.2 | $80.6 | $252.9 | $226.5 |
For the first nine months, operating cash flow was $161.0 million, versus $131.0 million a year earlier. Investing activities used $92.0 million (versus $250.9 million), including $60.5 million of fixed-asset purchases and $37.8 million for acquisitions. Financing activities used $60.5 million. Cash and cash equivalents were $40.9 million; including restricted cash, total cash was $59.1 million.
At September 30, 2023, term-loan principal was $972.0 million and revolver borrowings were $29.4 million. The balance sheet reports $966.5 million of debt, net of financing costs and original issue discount, excluding the separately presented revolver balance. Revolver availability was $351.4 million, after $19.2 million of letters of credit. Working capital was negative $374.2 million. The company reported compliance with its financial covenant.
Material changes versus the prior comparable period
- Third-quarter revenue grew 19.5%; nine-month revenue grew 20.9%. Q3 operating income rose 71%, while nine-month operating income rose 21%.
- Q3 full-service child care revenue increased 16.9%, including 8% net enrollment growth and approximately 7% average tuition increases at existing centers. Back-up care revenue rose 31.5% in Q3, driven by higher utilization and new clients. For the nine months, segment revenue increased 20.6% and 26.8%, respectively.
- Nine-month gross margin declined to 23.1% from 24.6%, primarily reflecting labor and back-up care provider costs and lower government support. The Q3 margin improved year over year to 24.4% from 23.8%.
- Nine-month net income increased modestly despite higher interest and tax expense. Net interest expense rose to $37.4 million from $26.7 million; the effective tax rate was 35.0% versus 26.7%.
- Net cash used in investing fell year over year as acquisition spending decreased. The 2023 period included $37.8 million for eight acquired centers; the 2022 period included the Only About Children acquisition of approximately 75 Australian centers.
Outlook, commentary, and risks
- Management expected occupancy to continue improving against prior-year periods through the rest of 2023, with more modest improvement in the U.K. Centers remained below pre-pandemic enrollment levels. The filing provides no formal full-year revenue or earnings guidance.
- Management estimated an overall weighted-average interest rate of approximately 4.85% for the remainder of 2023, including the effects of interest-rate caps. Variable-rate debt leaves the company exposed to interest-rate changes.
- The company said operating cash flows, cash balances, and revolver availability should fund obligations and liquidity needs for at least 12 months. Significant acquisitions, facility investments, or renewed disruption could require additional financing, which might not be available on reasonable terms.
- Labor-market constraints, wage inflation, higher provider fees, macroeconomic conditions, foreign-exchange movements, and the wind-down of pandemic-related government support may pressure costs, enrollment recovery, and margins. Average hourly center wages were approximately 8% higher than in 2022.
- Government programs reduced cost of services by $48.3 million in the first nine months of 2023, down from $68.6 million in 2022. The company recorded a $6.0 million expense for an immaterial correction of prior-period value-added tax, including $4.3 million in cost of services and $1.7 million in SG&A.
- Other notable comparability items: Q3 2022 included $6.7 million of acquisition transaction costs; the first nine months of 2022 included $9.2 million of such costs and a $5.9 million foreign-currency forward loss. The Only About Children acquisition also carries $105.0 million of deferred consideration at September 30, 2023.
- Ordinary-course legal claims were disclosed; management did not expect their resolution to materially adversely affect financial position, results, or cash flows, while noting outcomes cannot be predicted. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether enrollment and occupancy continue recovering, particularly in the U.K., and whether wage and staffing pressures limit margin improvement.
- How profitability evolves as pandemic-related government support declines, including the effect of the prior-period VAT correction.
- Interest costs, debt repayment, rate-cap protection, revolver usage, and payment of the Only About Children deferred consideration.
- Cash generation and liquidity against the working-capital deficit, planned capital spending, and acquisition activity.
- Performance of back-up care and whether its growth remains profitable after provider, technology, marketing, and personnel costs.