Business context and reporting period
Bright Horizons Family Solutions Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The filing reports full-year results; it does not provide a clear standalone fourth-quarter income statement in the supplied text. The company provides employer-sponsored child care, back-up care, and educational advisory services. At year-end it operated 1,078 centers, with capacity for approximately 120,000 children, and served more than 1,400 employer clients. The July 2022 acquisition of Australia-based Only About Children (OAC) added approximately 75 centers.
Financial and operating metrics
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $2,020.5 million | $1,755.3 million |
| Gross profit / margin | $478.7 million / 23.7% | $415.0 million / 23.6% |
| Income from operations / margin | $157.6 million / 7.8% | $129.0 million / 7.4% |
| Net income / diluted EPS | $80.6 million / $1.37 | $70.5 million / $1.15 |
| Adjusted EBITDA (non-GAAP) | $317.0 million | $272.1 million |
| Cash provided by operating activities | $188.5 million | $227.3 million |
By segment, revenue was $1,493.8 million from full-service child care (74%), $409.6 million from back-up care (20%), and $117.2 million from educational advisory and other services (6%). Segment operating income was $12.9 million, $118.8 million, and $25.9 million, respectively. The full-service segment remained comparatively low-margin during its enrollment recovery.
At December 31, 2022, cash and cash equivalents were $36.2 million; cash including restricted cash was $51.9 million. Gross principal borrowings were $1,068.0 million ($984.0 million term loans and $84.0 million revolver borrowings); $310.8 million remained available under the revolving facility. The company reported a $438.6 million working capital deficit and $904.5 million of lease liabilities. It stated that cash, operating cash flows, and available revolver capacity should fund obligations for at least the next 12 months.
Material changes versus prior year
- Revenue rose 15.1%, driven by enrollment growth and reopened centers, OAC contributions, and higher back-up and education-service utilization. OAC contributed $71.5 million of revenue after acquisition.
- Full-service tuition revenue increased 17.4%; enrollment increased 15%, but centers remained below pre-pandemic enrollment levels, with labor constraints limiting recovery. Lower sterling and euro exchange rates reduced 2022 tuition revenue by approximately $50 million.
- Operating income increased 22.1%; net income increased 14.4%. Gross margin was broadly stable. Back-up care revenue grew 16.6%, while its operating margin declined to 29.0% from 32.8%, partly due to a shift toward higher-cost center-based and in-home care.
- Operating cash flow decreased $38.8 million. Investing outflows rose to $278.0 million, including $210.4 million for acquisitions. Cash declined substantially, in part reflecting the OAC purchase and share repurchases.
- Net interest expense increased to $39.5 million from $36.1 million, reflecting higher revolver borrowings and rates. Foreign-currency forward contracts related to OAC generated a $5.9 million loss.
Outlook, risks, and unusual items
Management expects continued revenue improvement through 2023 but gives no specific consolidated revenue, earnings, or margin guidance in the supplied filing text. It identifies enrollment recovery, hiring and retaining educators, pricing against wage and inflationary pressures, cross-selling and service utilization, acquisitions, and improvement of underperforming centers as important to restoring and growing operating income. Management expects less government support in 2023, with most programs expected to end by September 30, 2023; support reduced costs by $86.8 million in 2022. The company estimates its 2023 weighted-average borrowing rate at approximately 4.25%.
Key risks include persistent labor shortages and wage inflation, slower-than-expected center enrollment recovery, remote or hybrid work reducing demand at some locations, foreign-exchange exposure, variable-rate debt and covenant constraints, and regulatory, safety, litigation, and reputational risks. On December 12, 2022, a ransomware incident disrupted operational and IT systems. The company said it did not then expect a material business or financial impact, but was still assessing costs, expenses, and insurance coverage. FY2022 also included $14.1 million of long-lived-asset impairment charges, $9.2 million of OAC transaction costs, and the $5.9 million currency-forward loss. These and other specified adjustments are excluded from certain non-GAAP measures.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting. OAC was excluded from management’s internal-control assessment for 2022.
Important facts for investors to verify
- Whether center enrollment, staffing availability, and center-level profitability improve as management anticipates, and how much recovery depends on temporary government support.
- OAC’s post-acquisition performance, integration progress, and final purchase-price allocation; $106.5 million of deferred consideration is payable 18 months after closing.
- Cash generation, working-capital needs, debt service, revolver availability, and compliance with the first-lien net-leverage covenant as interest costs rise.
- The ultimate costs and insurance recovery, if any, associated with the December 2022 ransomware incident.
- How labor costs, foreign-exchange movements, and seasonal enrollment affect reported margins and the gap between GAAP results and non-GAAP adjusted measures.