Bright Horizons Family Solutions Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. The company provides center-based child care and early education, back-up care, and educational advisory services, primarily through employer contracts. COVID-19 closures substantially disrupted center operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $293.8m | $528.1m | $800.1m | $1,029.8m |
| Gross profit / margin | $65.2m / 22.2% | $139.6m / 26.4% | $174.1m / 21.8% | $266.6m / 25.9% |
| Operating income / margin | $8.1m / 2.8% | $74.8m / 14.1% | $51.4m / 6.4% | $137.7m / 13.4% |
| Net income | $0.4m | $49.3m | $31.1m | $91.4m |
| Adjusted EBITDA (non-GAAP) | $60.0m | $105.9m | $141.5m | $199.7m |
| Operating cash flow | Not separately stated | Not separately stated | $51.3m | $190.6m |
- Q2 revenue fell 44% year over year; first-half revenue declined 22%. Q2 net income was close to break-even despite a $1.0m pretax loss, partly reflecting a $1.4m income tax benefit.
- Q2 segment revenue: full-service child care $137.3m, down 69%; back-up care $135.9m, up 94%; educational advisory services $20.6m, up 6%. Increased use of self-sourced reimbursed care supported back-up care growth.
- Q2 cost of services included $14.0m of COVID-related impairment charges and center-closure costs; first-half COVID-related impairments and closure costs totaled $23.4m. The company also recorded $39.6m of government assistance as a reduction to labor costs in the first half.
- First-half investing cash outflow was $28.3m, versus $90.9m in 2019. Financing cash inflow was $221.5m, principally reflecting the stock issuance.
Balance sheet, debt and liquidity
- At June 30, 2020, cash and cash equivalents were $270.4m ($274.7m including restricted cash), versus $27.9m ($31.2m including restricted cash) at year-end 2019. Working capital was $85.4m, compared with a $254.4m deficit at year-end.
- Long-term debt, net, was $1.025bn; term-loan principal was $1.040bn. No revolving-credit borrowings were outstanding. The revolving facility was expanded to $400m, with maturity in July 2022; term loans mature in November 2023.
- The company issued 2.14m shares in April at $116.90 per share, raising $249.8m net. Share repurchases were suspended; $194.9m remained authorized. Operating lease liabilities totaled $816.8m, and $42.4m of additional leases had not yet commenced.
- Management stated that available cash, operating cash flows and revolver availability should fund obligations for at least 12 months, while warning prolonged disruption could require additional financing. The company reported compliance with its financial covenant at June 30.
Outlook, risks and notable items
- Management expected more than 85% of centers to reopen by September 30, 2020, subject to local conditions, and anticipated adverse COVID-19 effects through the rest of 2020 and potentially beyond. It could not estimate how quickly reopened centers would regain typical enrollment or rule out further permanent closures. No formal earnings guidance was provided.
- At June 30, 409 centers were operating out of 1,076 managed centers. The company had decided not to reopen 18 locations. As of July 31, it reported 390 operating U.S. centers and 265 in the U.K.; all 61 Netherlands centers were operating.
- Cost and liquidity actions included furloughs, reduced discretionary spending, voluntary executive and director compensation reductions, vendor and landlord payment renegotiations, government relief programs, and the equity offering. Lease-payment deferrals were $11.7m.
- Key risks include additional closures or lower enrollment, staffing constraints and safety costs, client financial deterioration and slower receivable collection, uncertain demand after the surge in back-up care, and possible further impairments. The allowance for credit losses on receivables rose to $8.4m from $1.2m at year-end.
- Interest-rate exposure remains because debt is variable-rate; the company had $500m of interest-rate swaps and entered into $800m of interest-rate caps. Legal matters were described as ordinary-course claims; management did not expect a material adverse effect but could not predict outcomes or insurance sufficiency.
Important facts for investors to verify
- Actual reopening progress, center enrollment, permanent closures, and whether the September 2020 reopening expectation was achieved.
- Whether back-up care growth and government assistance were temporary, and the resulting underlying margins and cash generation.
- Receivables collection trends, further credit-loss provisions, and any additional asset impairments.
- Liquidity and covenant headroom under the amended credit agreement, including the transition to a 4.25:1.00 maximum net leverage covenant beginning in the second quarter of 2021.
- The effect of the 2.14m-share issuance and the company’s substantial debt and lease obligations. Adjusted EBITDA excludes specified costs, including COVID-related impairments and closures, and should be assessed alongside GAAP results and cash flow.