Bright Horizons Family Solutions Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014. Bright Horizons provides employer-sponsored child care, backup dependent care, and education-related services in the U.S. and several other countries.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $370.5 million | $348.1 million | $720.9 million | $680.3 million |
| Gross profit / margin | $95.9 million / 25.9% | $83.1 million / 23.9% | $182.5 million / 25.3% | $160.3 million / 23.6% |
| Operating income / margin | $52.1 million / 14.1% | $42.5 million / 12.3% | $95.0 million / 13.2% | $76.5 million / 11.3% |
| Net income | $26.9 million | $21.7 million | $49.5 million | $37.8 million |
| Diluted EPS | $0.43 | $0.32 | $0.78 | $0.56 |
For the six months, operating cash flow was $115.0 million versus $104.4 million a year earlier. Investing activities used $64.2 million, including $41.8 million of fixed-asset purchases and $22.4 million for acquisitions; financing activities used $62.4 million, chiefly reflecting $72.6 million in share repurchases. Cash ended the period at $76.9 million, down from $87.9 million at year-end.
At June 30, total debt carrying value was $918.2 million, including $9.6 million current debt; term-loan principal was $934.4 million. The $100 million revolving facility was undrawn and fully available. The company reported an $83.5 million working-capital deficit, compared with $56.3 million at year-end, and stated that cash, operating cash flow, and available revolver capacity should cover planned needs for at least 12 months under current conditions.
Material changes and operating drivers
- Q2 revenue rose 6%; six-month revenue also rose 6%. Growth reflected new and ramping centers, enrollment gains, typical annual tuition increases of 3–4%, and expanding backup-care and advisory services; European foreign-currency effects partly offset growth.
- Q2 enrollment in full-service center-based care increased approximately 6%. The company operated 922 centers at June 30, compared with 882 a year earlier. The May acquisition of Hildebrandt Learning Centers added 40 centers and approximately $4.0 million of Q2 revenue.
- Profitability improved as revenue growth outpaced service costs, aided by center ramp-up, enrollment growth, cost management, and backup-care expansion. SG&A increased, including wage and technology investment. Interest expense rose following the December 2014 issuance of $165 million in additional term loans.
- Adjusted EBITDA, a non-GAAP measure, was $74.8 million in Q2 and $140.2 million for the six months, versus $64.4 million and $121.8 million, respectively. The company cautions that adjusted measures are not substitutes for GAAP results or cash flow.
- The company repurchased 1.3 million shares for $72.6 million in the first half; $177.4 million remained under its $250 million authorization at June 30. Shares repurchased were retired.
Outlook, risks, and notable matters
- No specific revenue or earnings guidance was provided. Management expected positive operating cash flow and stated that available liquidity was adequate for at least 12 months under current operating conditions; significant acquisitions or facility investments could require additional financing.
- Management expected the 2015 annual effective tax rate to be approximately 36%. The first-half rate was 33.7%, including a $1.3 million benefit from tax-item adjustments. Tax audits and uncertain tax positions remain; the potential change in unrecognized tax benefits was estimated at zero to $0.7 million, excluding interest and penalties.
- Results are seasonal: child-care demand typically falls during summer and rises around the start of the school year; backup-care usage may increase during school breaks and holidays. Enrollment, staffing, center openings and ramp-up, acquisitions, contract mix, competition, and economic conditions can also affect results.
- Internal controls: Disclosure controls were deemed ineffective at June 30 because of a material weakness involving user-access and program-change-management controls for certain financial systems. Remediation was underway and expected to continue through 2015; management said the weakness would not be considered remediated until controls had operated and been tested effectively. Management nevertheless stated that the financial statements fairly presented the periods shown.
- The company reported compliance with debt covenants and no off-balance-sheet arrangements. It disclosed ordinary-course legal matters and said no material risk-factor changes had occurred since its 2014 Form 10-K.
Important facts for investors to verify
- Progress and testing of the remediation plan for the material weakness in financial reporting controls.
- Debt service, covenant status, and liquidity needs, particularly if acquisitions or center investments accelerate.
- Whether margin gains persist as new centers ramp up and labor, occupancy, and backup-care provider costs evolve.
- Share-repurchase pace and remaining authorization alongside capital spending and acquisition needs.
- Resolution of tax audits and uncertain tax positions, and the effect of seasonality and foreign-currency movements on subsequent results.