Bright Horizons Family Solutions Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Bright Horizons provides child care, back-up dependent care, and education-related services in the U.S. and internationally. Figures below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $348.1 | $310.8 | $680.3 | $590.9 |
| Gross profit / margin | $83.1 / 23.9% | $75.4 / 24.3% | $160.3 / 23.6% | $141.2 / 23.9% |
| Operating income / margin | $42.5 / 12.2% | $35.4 / 11.4% | $76.5 / 11.3% | $50.8 / 8.6% |
| Net income (loss) | $21.7 | $24.5 | $37.8 | ($26.3) |
| Diluted EPS | $0.32 | $0.37 | $0.56 | ($0.43) |
| Adjusted EBITDA (non-GAAP) | $64.4 | $56.7 | $121.8 | $105.2 |
Q2 revenue rose 12%; management attributed growth to new and ramping centers, greater back-up care sales, annual tuition increases of typically 3–4%, and acquisitions. Operating income increased 20%, while gross margin was slightly lower. Net income declined despite higher operating income, principally reflecting the higher effective tax rate: 36.0% versus 7.4% in Q2 2013. For the first half, revenue rose 15% and operating income rose 51%; the prior-year comparison included a $63.7 million debt-extinguishment loss and other IPO- and transaction-related charges. Acquired businesses contributed approximately $44.1 million of first-half 2014 revenue; the company operated 882 centers at June 30, versus 830 a year earlier.
Cash flow, liquidity, and debt
- First-half operating cash flow was $104.4 million, compared with $98.4 million a year earlier. Investing activities used $36.2 million, including $30.7 million of fixed-asset purchases and $6.5 million for acquisitions. Financing activities provided $14.2 million.
- Cash increased to $112.3 million at June 30 from $29.6 million at year-end 2013. The company reported a $25.4 million working-capital deficit, improved from $89.9 million at year-end.
- Term-loan principal was $778.2 million; reported total debt net of financing costs and discount was $761.8 million, including $7.9 million current. The term loan’s effective interest rate was 3.75%. The $100 million revolving facility was undrawn and fully available.
- Management stated that cash, operating cash flows, and available revolver capacity should cover planned operating and capital needs for at least 12 months under current conditions. Debt facilities mature in 2020 (term loan) and 2018 (revolver); the company reported covenant compliance.
Changes, outlook, and risks
- Growth reflected enrollment gains, center openings and ramp-ups, acquisitions, and tuition increases. First-half cost of services grew faster than revenue, leaving gross margin modestly lower; management cited personnel, occupancy, supplies, and acquisition integration costs.
- The board authorized a share-repurchase program of up to $225 million in March 2014. During Q2, the company repurchased and retired 78,447 shares for approximately $3.1 million.
- No specific earnings or revenue guidance was provided. Management expects positive operating cash flow and continued selective acquisitions, but notes that significant acquisitions or facility investments could require additional financing, which may not be available on acceptable terms.
- Management describes seasonality: child-care demand generally falls in summer and rises around the school-year start; back-up care usage tends to increase during school breaks and holidays. Results can also vary with enrollment, staffing, center openings, acquisitions, and contract mix.
- Disclosed risks include demand changes, hiring and retention, substantial debt and restrictive covenants, acquisition execution, sponsor relationships, cost increases, competition, regulation, litigation and insurance exposure, data security, and catastrophic events. Ordinary-course legal claims are not expected by management to have a material adverse effect, though outcomes and insurance adequacy cannot be assured.
- The company is evaluating the effect of the new revenue-recognition standard, effective for annual periods beginning on or after December 15, 2016; the impact was not yet determined.
Important facts for investors to verify
- Whether enrollment, center ramp-up, tuition increases, and acquired operations can sustain growth without further gross-margin pressure.
- How the higher 2014 tax rate affects reported earnings, and the assumptions underlying future effective tax rates.
- Debt repayment capacity, variable-rate exposure, covenant terms, and the balance between acquisitions, capital spending, and the announced repurchase authorization.
- The contribution and integration performance of acquired businesses, including the limits on separately identifying their net income.
- Management’s non-GAAP adjusted measures alongside GAAP results; the filing cautions that these measures do not capture all cash needs, debt service, or future capital expenditures.