Bright Horizons Family Solutions Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016, compared with the three months ended March 31, 2015. Bright Horizons provides employer- and family-focused child care, backup dependent care, and education advisory services in the U.S., U.K., and other countries.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $385.3 million | $350.4 million |
| Gross profit / margin | $95.8 million / 24.9% | $86.6 million / 24.7% |
| Operating income / margin | $48.6 million / 12.6% | $42.8 million / 12.2% |
| Net income / margin | $24.7 million / 6.4% | $22.5 million / 6.4% |
| Diluted EPS | $0.40 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $72.4 million | $65.5 million |
| Operating cash flow | $85.8 million | $47.3 million |
Revenue grew 10%, primarily from new and ramping centers, acquisitions, expanded backup-care and advisory services, and typical annual tuition increases of 3%–4%. Full-service center-based care revenue rose 9%, including approximately $14.0 million of incremental revenue from 2015 acquisitions; enrollment increased approximately 6%. Backup-care revenue increased 9%, and advisory-services revenue increased 34%. The company operated 936 centers, versus 885 a year earlier. Gross margin improved slightly; operating margin also increased. Net income growth was partly offset by higher interest and tax expense.
Cash provided by operations increased substantially, reflecting working-capital timing, including higher deferred revenue, lower cash tax payments, and routine expense timing, as well as higher net income. Investing cash use was $13.6 million, including $10.6 million of fixed-asset purchases and $2.9 million for acquisitions. Financing cash use was $43.8 million, including $23.4 million of share repurchases and $24.0 million of net revolver repayments. Cash ended the quarter at $40.2 million.
Balance sheet, debt, and liquidity
- At March 31, 2016, the company had $40.2 million in cash and a $142.0 million working-capital deficit. Management attributed the deficit to funding long-term investments and repurchases with operating cash.
- Term-loan principal was $927.3 million; reported debt, net of financing costs and discount, was $912.8 million. The term loans mature January 30, 2020, with a $891.5 million final principal payment scheduled for 2020.
- The amended revolving facility increased from $100 million to $225 million, with maturity extended to July 31, 2019. There were no revolver borrowings at quarter-end, versus $24.0 million at December 31, 2015. The company reported compliance with its financial covenants.
- Management expected operating cash flows, cash balances, and available revolver capacity to fund planned operating and capital needs for at least 12 months under current conditions. Significant additional acquisitions or investments could require further financing, which may not be available on reasonable terms or at all.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management expected the 2016 full-year effective tax rate to be approximately 35% and anticipated continued positive operating cash flow.
- Results are seasonal: child-care and education demand typically falls during summer, while backup-care usage can rise during school breaks and holidays. Enrollment, staffing, center openings and ramp-up, acquisitions, contract mix, and economic conditions can also affect quarterly results.
- Disclosure controls were deemed ineffective at March 31, 2016 because of an unremediated material weakness in IT general controls, specifically user access and program-change management. Remediation was underway and expected to continue through 2016; management said the financial statements fairly present the company’s results.
- Debt carries variable interest rates. The filing reported no significant change in interest-rate or foreign-currency exposure since year-end and no hedging instruments. The company also noted ordinary-course legal claims, with insurance adequacy not assured; it reported no material changes to its previously disclosed risk factors.
- The company repurchased 407,911 shares during the quarter for approximately $25.5 million; all repurchased shares were retired. Three U.K. centers were acquired for $2.3 million cash consideration; the purchase-price allocation remained preliminary and the acquired operations were not material.
- Adjusted EBITDA and other adjusted measures are non-GAAP measures and should not be treated as substitutes for GAAP results or as cash available to meet obligations.
Most important facts for investors to verify
- Progress and testing results in remediating the IT-controls material weakness.
- Whether operating cash flow remains strong after the first-quarter working-capital and tax-payment timing benefits.
- Enrollment, center ramp-up costs, and profitability trends across the three service segments.
- Debt-service capacity, variable-rate exposure, and the large 2020 term-loan maturity.
- Share-repurchase pace and any significant acquisition or financing needs.