Bright Horizons Family Solutions Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016 unless otherwise stated. The company provides workplace child care and education, back-up dependent care, and educational advisory services in the U.S. and several international markets. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $422.2 million | $385.3 million | Up 10% |
| Gross profit / margin | $104.9 million / 24.9% | $95.8 million / 24.9% | Profit up 10%; margin stable |
| Income from operations / margin | $51.4 million / 12.2% | $48.6 million / 12.6% | Income up 6% |
| Net income | $41.4 million | $24.7 million | Up 67% |
| Diluted EPS | $0.68 | $0.40 | Up 70% |
| Adjusted EBITDA (non-GAAP) | $78.3 million | $72.4 million | Up 8% |
| Adjusted net income (non-GAAP) | $36.9 million | $31.1 million | Up 19% |
| Net cash from operating activities | $106.7 million | $85.8 million | Up $20.9 million |
Revenue by segment: Full service center-based care generated $358.8 million, up 9%; back-up dependent care generated $50.4 million, up 12%; and other educational advisory services generated $13.0 million, up 14%. Management attributed growth to new and ramping centers, enrollment gains, expanded service sales, and typical annual tuition increases of 3–4%. The Asquith acquisition contributed $21.8 million of Q1 revenue. Lower U.K. foreign exchange rates reduced revenue growth by approximately 2%.
Cash, debt and liquidity
- Cash and cash equivalents were $21.5 million at March 31, 2017, including $18.5 million held outside North America. The company reported a working capital deficit of $189.6 million, down from $233.2 million at December 31, 2016.
- Operating cash flow was $106.7 million; investing activities used $22.9 million, including $19.9 million of fixed-asset purchases and $2.9 million for Netherlands center acquisitions. Financing activities used $77.1 million, including $61.1 million of net revolver repayments and $23.3 million of taxes on net share settlements.
- Term-loan borrowings were $1.072 billion and revolver borrowings were $14.9 million at quarter-end. The term loans mature November 2023; the $225 million revolver then matured July 2019. Borrowings bear variable interest rates. The company said it was in compliance with financial covenants at March 31.
- On May 8, 2017, after quarter-end, the company amended its credit facilities, reducing applicable interest-rate margins and extending the revolver maturity to July 2022; the term-loan maturity remained November 2023.
- Management said operating cash flow, existing cash and revolver borrowings should cover planned operating and capital expenditures for at least the next 12 months under current conditions. Significant additional acquisitions or facility investments could require financing, which may not be available on reasonable terms or at all.
Material changes and unusual items
- Net income included a $15.1 million excess tax benefit from stock-option exercises and restricted-stock vesting following the prospective adoption of ASU 2016-09. The reported effective tax rate was a 1.8% benefit; management said it would have been approximately 35% without this benefit. The prior-year effective tax rate was 34.8%. The tax benefit materially boosts reported net income and is not a like-for-like measure of operating improvement.
- Operating cash flow also reflects the new accounting treatment for stock-compensation tax benefits; the filing notes that the benefit had been classified in financing cash flow in the prior period.
- Center count increased to 1,041 from 936 a year earlier. Q1 included three Netherlands centers acquired in two transactions; their operating results were not material. The larger Asquith acquisition, a U.K. operator of 90 centers, was completed in November 2016.
- The board’s $300 million share-repurchase authorization had $275.6 million remaining at March 31. The company repurchased approximately 103,000 shares in Q1 for about $7.2 million; repurchased shares were retired.
- Goodwill was $1.274 billion and other intangible assets were $367.7 million at March 31. The company noted that lease accounting changes under ASU 2016-02 are expected to materially affect the balance sheet when adopted; adoption of the new revenue standard was not expected to materially affect consolidated results.
Outlook, commentary and risks
The filing provides no specific full-year revenue, earnings or margin guidance. Management expects excess tax benefits of approximately $3.0–$4.5 million for the remainder of 2017, while noting that actual amounts depend on the timing and volume of equity activity. Management cited continued positive operating cash flow as an expectation, not a guarantee.
Results are seasonal: child-care and education demand typically falls during summer, while back-up care usage can rise when schools are closed and increase program costs. Results can also vary with enrollment and staffing, center openings and ramp-up, acquisitions and integration, contract mix, sponsorship payments, competition, and economic conditions. Other disclosed exposures include variable interest rates, foreign currency movements, debt and covenant obligations, uncertain tax positions, and ordinary-course litigation; management said no material risk-factor changes occurred since the 2016 Form 10-K. The company does not use derivatives to hedge market risk.
Important facts for investors to verify
- Separate the $15.1 million stock-compensation tax benefit from recurring earnings when assessing the sharp increase in GAAP net income and EPS; compare with adjusted measures and their stated limitations.
- Track enrollment, new-center ramp-up, Asquith integration, and segment-level profitability against the reported revenue growth.
- Monitor debt service, variable-rate exposure, revolver availability and covenant headroom, including the effects of the May 8, 2017 refinancing amendment.
- Assess capital spending, acquisitions, share repurchases and the working-capital deficit alongside operating cash flow.
- Review the potential balance-sheet impact of lease-standard adoption and the final purchase-price allocations for recent acquisitions.