Bright Horizons Family Solutions Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. The company provides child care and early education, back-up care, and educational advisory services, primarily through multi-year employer contracts. At quarter-end it operated 1,083 centers and served more than 1,100 employer clients.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First six months 2019 | First six months 2018 |
|---|---|---|---|---|
| Revenue | $528.1 million | $489.7 million | $1,029.8 million | $953.4 million |
| Gross profit / margin | $139.6 million / 26.4% | $126.0 million / 25.7% | $266.6 million / 25.9% | $239.6 million / 25.1% |
| Operating income / margin | $74.8 million / 14.1% | $64.6 million / 13.2% | $137.7 million / 13.4% | $119.9 million / 12.6% |
| Net income | $49.3 million | $40.4 million | $91.4 million | $77.7 million |
| Diluted EPS | $0.83 | $0.68 | $1.55 | $1.31 |
| Adjusted EBITDA (non-GAAP) | $105.9 million | $95.4 million | $199.7 million | $178.6 million |
Q2 revenue increased 8%, operating income 16%, and net income 22% year over year. For the first six months, revenue rose 8%, operating income 15%, and net income 18%. Management attributed growth primarily to new and ramping centers, enrollment gains, annual price increases of approximately 3%–4%, and expanded back-up care and educational advisory services. Back-up care revenue increased 19% in both comparison periods; full-service child care revenue increased 6%.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $190.6 million, versus $188.8 million a year earlier. Investing cash use was $90.9 million and financing cash use was $112.4 million. Cash, cash equivalents, and restricted cash totaled $26.2 million at June 30.
- Cash and cash equivalents were $22.7 million. Term-loan principal was $1.051 billion; the revolving facility had no borrowings outstanding, compared with $118.2 million at December 31, 2018. Net debt carrying value was $1.043 billion. The term loan matures in November 2023.
- Operating lease liabilities totaled $734.7 million, including $80.7 million current. The company also disclosed $84.0 million of leases not yet commenced.
- Working capital deficit was $266.2 million, improved from $289.9 million at year-end. Management said the deficit reflects investment in fixed assets and acquisitions, share repurchases, and the lease-accounting adoption.
- Capital expenditures were $48.2 million; acquisition payments were $25.9 million. The company was compliant with financial covenants and reported no off-balance-sheet arrangements.
Outlook, commentary, and risks
- No specific revenue or earnings guidance was provided. Management expected positive operating cash flow and stated that cash, operations, and available revolving-credit capacity should fund planned operating and capital needs for at least 12 months under current conditions.
- Management estimated a 2019 annual effective tax rate of approximately 22%–24%, affected by equity-award tax benefits and the mix of international earnings. It estimated a weighted average interest rate of approximately 4.0%–4.25% for the remainder of 2019.
- Results are seasonal: child-care demand generally falls during summer, while back-up care usage can rise during school breaks and holidays. Other factors include enrollment and staffing, new-center ramp-up, client launch timing, and economic conditions.
- Key exposures include wage and care-provider costs, foreign-exchange movements, variable interest rates, debt covenants, and the possibility that significant acquisitions or facility investments could require additional financing. The company hedged interest exposure on $500 million of term debt; swaps had a $2.0 million liability at quarter-end.
- ASC 842 adoption on January 1, 2019 added lease assets and liabilities to the balance sheet without affecting earnings or cash flows. Four acquisitions were completed in the first half; contingent consideration had a preliminary fair value of $16.4 million, with purchase-price allocations still open. A further $5.8 million investment in a German provider occurred after quarter-end.
- The filing reports ordinary-course legal claims and tax audits; management did not expect legal matters to materially affect results but noted insurance may not cover all liabilities. No material risk-factor changes from the 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether enrollment growth, new-center ramp-up, and back-up care expansion continue to support revenue and margin improvement, and how labor and provider costs evolve.
- Debt service, covenant headroom, variable-rate exposure, and the substantial lease commitments alongside the working capital deficit.
- Cash conversion after capital expenditures, acquisitions, and other financing uses; adjusted EBITDA is non-GAAP and should not be treated as cash available for investment or debt repayment.
- Final acquisition valuations and contingent consideration, as well as the effects of foreign currency, equity-award tax benefits, tax examinations, and seasonality.
- The company had $258.4 million remaining under its $300 million share-repurchase authorization at June 30, 2019.