Bright Horizons Family Solutions Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods. The company provides child care, back-up dependent care and educational advisory services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $365.9m | $335.0m | $1,086.8m | $1,015.2m |
| Gross profit / margin | $85.4m / 23.3% | $72.9m / 21.8% | $267.9m / 24.6% | $233.1m / 23.0% |
| Operating income / margin | $41.7m / 11.3% | $33.0m / 9.9% | $136.7m / 12.6% | $109.6m / 10.8% |
| Net income | $20.6m | $15.4m | $70.0m | $53.1m |
| Diluted EPS | $0.33 | $0.23 | $1.11 | $0.79 |
| Adjusted EBITDA (non-GAAP) | $64.7m | $55.3m | $205.0m | $177.1m |
Quarterly revenue rose 9%; nine-month revenue rose 7%. Management attributed growth to new and ramping centers, tuition increases of typically 3–4%, enrollment gains and expansion in back-up care, partly offset by foreign currency effects. Overall enrollment increased approximately 8% in Q3. Gross margin improved as revenue growth outpaced service costs, reflecting center maturation, enrollment growth and cost management. Q3 and nine-month adjusted EBITDA increased 17% and 16%, respectively; these are non-GAAP measures and are not substitutes for GAAP results or cash flow.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $142.3m, versus $121.3m in 2014. Investing cash outflow was $128.1m, including $61.4m of fixed-asset purchases and $66.7m for acquisitions. Financing cash outflow was $80.5m, including $117.5m of share repurchases. Cash declined from $87.9m at year-end 2014 to $21.4m.
- At September 30, cash was $21.4m; revolving-credit borrowings were $26.5m, leaving $73.5m available under the $100m facility. Working-capital deficit was $148.5m, compared with $56.3m at December 31, 2014.
- Term-loan principal was $932.0m; reported long-term debt, net of financing costs and discount and excluding current maturities, was $907.1m. The term loans mature in 2020; the revolver matures in 2018. Term-loan effective interest rate was 3.84%. The company reported compliance with financial covenants at quarter-end.
- Management expected operating cash flows, cash on hand and revolver availability to fund planned operating and capital needs for at least the next 12 months under current conditions. Significant additional acquisitions or facility investments could require further financing, which may not be available on reasonable terms or at all.
Material developments, outlook and risks
- 2015 acquisitions included Hildebrandt Learning Centers and Active Learning Childcare, plus five smaller center acquisitions. The company reported acquiring 54 centers for $66.7m in the first nine months; the acquisitions contributed approximately $16.7m of incremental revenue over that period.
- The company repurchased 2.1m shares for $117.5m in the first nine months under a $250m authorization; $132.5m remained available at September 30. Some repurchases were made from Bain-affiliated funds in connection with secondary offerings. Bain-affiliated funds held approximately 33.5% of shares at quarter-end.
- Management expected the 2015 annual effective tax rate to be approximately 35%. No specific revenue, earnings or cash-flow guidance was provided in the filing.
- Results are subject to seasonality: child-care demand typically rises with the September/October school-year start, while summer enrollment and back-up-care utilization can affect costs. Other stated sensitivities include enrollment and staffing, new-center ramp-up, acquisitions, contract mix, competition and foreign currency movements.
- Disclosure controls and procedures were deemed ineffective because of an unresolved material weakness in user-access and program-change-management controls for certain financial systems. Management said remediation was underway, expected through year-end 2015 and potentially into 2016; the weakness would remain until controls had operated and been tested effectively. Management nevertheless stated that the interim financial statements fairly presented the company’s results.
- Ordinary-course legal claims were not expected by management to have a material adverse effect, though outcomes and insurance coverage cannot be assured. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the internal-control material weakness was remediated and independently tested, and whether any related reporting issues emerged.
- Cash generation and working-capital trends relative to acquisition, capital-spending and repurchase commitments.
- Debt levels, interest costs, covenant headroom and the company’s capacity to fund planned growth.
- Organic enrollment and center profitability trends separately from acquired revenue, including currency effects and center ramp-up costs.
- The distinction between GAAP results and adjusted non-GAAP measures, including the adjustments used in reported EBITDA and adjusted income.