Bright Horizons Family Solutions Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in U.S. dollars. The company provides child care and early education, back-up dependent care, and educational advisory services. It operated 1,071 centers and served more than 1,100 employer clients at quarter-end.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $471.6M | $433.3M | $1,424.9M | $1,301.0M |
| Gross profit / margin | $113.0M / 24.0% | $103.2M / 23.8% | $352.6M / 24.7% | $322.5M / 24.8% |
| Operating income / margin | $55.5M / 11.8% | $45.0M / 10.4% | $175.4M / 12.3% | $153.2M / 11.8% |
| Net income | $33.6M | $31.1M | $111.3M | $105.5M |
| Diluted EPS | $0.57 | $0.51 | $1.88 | $1.74 |
| Adjusted EBITDA (non-GAAP) | $85.2M | $76.6M | $263.8M | $241.5M |
Q3 revenue rose 9%; nine-month revenue rose 10%. Growth reflected new and ramping centers, enrollment gains, annual tuition increases of 3–4%, and expansion in back-up care and educational advisory services. Full-service center-based child care revenue increased 8% in Q3 and 9% year to date; back-up care grew 11% and 10%, respectively; educational advisory services grew 19% and 22%. Nine-month operating income increased 14%, while net income increased about 6%. Q3 operating margin improved partly because the prior-year quarter included $3.7M of Ireland disposition costs.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $239.7M, versus $213.0M in 2017. Investing used $114.3M, including $62.5M of fixed-asset purchases and $51.7M for acquisitions. Financing used $118.2M, including $85.7M for share repurchases.
- Cash and cash equivalents were $21.3M at September 30; cash, cash equivalents, and restricted cash totaled $43.5M. The company reported a $278.1M working-capital deficit.
- Term-loan principal was $1.059B and revolver borrowings were $94.0M; $131.0M remained available on the $225M revolving facility. The term loan matures in 2023. The company amended its credit facilities in May 2018 to reduce applicable interest rates; borrowings remain variable-rate, with $500M of term-loan exposure hedged through swaps.
- The company said operating cash flow, cash balances, and available revolver capacity should cover planned operating and capital needs for at least the next 12 months under current conditions. It was in compliance with financial covenants at quarter-end.
Material changes, outlook, and risks
- Revenue and operating income increased, while gross margin was broadly stable year to date. Enrollment rose approximately 6% in Q3 and 5% for the first nine months in full-service centers. Higher personnel, provider, occupancy, and technology costs accompanied growth.
- The company acquired 28 centers in five transactions during the first nine months for $51.6M net of cash acquired, plus $4.1M of consideration payable. Purchase price allocations remained preliminary.
- The company repurchased 0.8M shares for $85.7M during the nine months. A new $300M repurchase authorization took effect in June; the full amount remained available at September 30.
- Management estimated a 2018 annual effective tax rate of approximately 21%–23%, subject to equity activity, international earnings mix, and GILTI implementation. No broader revenue or earnings guidance is stated in the filing.
- The company expects adoption of the lease standard effective in 2019 to materially increase balance-sheet assets and liabilities, primarily for real-estate leases; it does not expect a material income-statement or cash-flow impact.
- Seasonality affects child-care demand and back-up care usage. Other cited uncertainties include enrollment and staffing, center openings and ramp-up, acquisitions and integration, competition, economic conditions, foreign exchange, variable interest rates, tax matters, and litigation. The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and no material adverse effect expected from ordinary-course legal proceedings, while noting insurance may not cover all liabilities.
Important facts for investors to verify
- Whether enrollment, center ramp-up, and segment growth continue to support margins as labor, occupancy, and technology costs rise.
- Cash generation and working-capital needs relative to acquisition spending, capital expenditures, debt service, and the remaining share-repurchase authorization.
- Debt covenant headroom, variable-rate exposure, and the effectiveness and accounting impact of interest-rate hedges.
- The eventual effects of lease-standard adoption, tax-rate assumptions and GILTI, and final purchase-price allocations for recent acquisitions.
- Non-GAAP results alongside GAAP results: adjusted EBITDA excludes items and is not a substitute for cash flow or funds available to meet obligations.