Bright Horizons Family Solutions Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including the fourth quarter.
Business context
Bright Horizons provides employer-sponsored child care and early education, back-up dependent care, and educational advisory services. At year-end it operated 880 centers with capacity for approximately 99,700 children, serving more than 900 employer clients across North America, Europe, and India. Full-service center-based care represented 86% of annual revenue.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1,218.8 million | $1,070.9 million |
| Gross profit / margin | $280.9 million / 23.1% | $245.8 million / 22.9% |
| Operating income / margin | $109.0 million / 9.0% | $95.5 million / 8.9% |
| Net income | $12.3 million | $8.5 million |
| Adjusted EBITDA / margin | $208.5 million / 17.1% | $180.9 million / 16.9% |
| Adjusted net income | $78.3 million | $37.8 million |
| Operating cash flow | $159.7 million | $107.0 million |
| Cash at year-end | $29.6 million | $34.1 million |
Revenue increased 13.8%, driven by acquisitions, enrollment gains, expanded back-up care sales, and typical annual tuition increases of 3%–4%. Operating income rose 14.2%; gross margin improved modestly while operating margin was essentially flat. Adjusted EBITDA and adjusted net income are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
Fourth-quarter revenue was $319.2 million versus $273.4 million in 2012; operating income was $30.4 million versus $27.9 million, and net income was $23.7 million versus $4.2 million.
At December 31, 2013, total debt principal was $782.1 million; the balance-sheet debt amount, net of financing costs and discount, was $764.2 million. The company reported a $89.9 million working-capital deficit and $100 million of undrawn revolving credit capacity. Its new term loan matures in 2020; the revolver matures in 2018. The company stated it was in compliance with financial covenants.
Material changes and unusual items
- Completed a January 2013 IPO, raising $233.3 million net, and converted the former Class L shares into common stock.
- Refinanced prior debt with a $790 million term loan and $100 million revolving facility. Debt principal declined from $928.3 million at year-end 2012 to $782.1 million at year-end 2013; reported annual cash interest paid fell from $52.0 million to $34.9 million.
- Recorded a $63.7 million debt-extinguishment loss, including redemption premiums and write-off of financing costs. This significantly reduced GAAP pretax income despite lower interest expense.
- Acquired Kidsunlimited (64 UK centers) and Children’s Choice (49 U.S. centers), among other businesses. Acquisitions contributed approximately $86.9 million of incremental revenue in 2013, according to management.
- Reported a $7.5 million sponsor-management agreement termination fee, $5.0 million performance-based stock-compensation charge, $4.0 million acquisition costs, and $1.3 million of secondary-offering costs in 2013 SGA.
- Recorded a $7.5 million income-tax benefit, principally reflecting resolution of tax matters and other tax adjustments. Net income attributable to the company was $12.6 million, compared with consolidated net income of $12.3 million.
Outlook, commentary, and risks
Management expected approximately 30–35 net new centers in 2014, fixed-asset spending of approximately $75–$80 million, and a similar level of operating cash flow to 2013. It expected available cash, operating cash generation, and revolver capacity to cover planned needs for at least 12 months under current conditions. The filing does not provide specific revenue or earnings guidance.
Management cited enrollment growth, pricing, service expansion, successful acquisition integration, and improved performance at underperforming centers as key drivers of future results. Risks include economic weakness and enrollment declines, hiring and retaining qualified teachers, wage and benefit inflation, regulatory and child-safety matters, litigation and reputational damage, acquisition integration, foreign currency exposure, seasonality, and substantial variable-rate debt. A 100-basis-point rate increase was estimated to raise 2013 interest expense by approximately $7.4 million based on debt outstanding during that year. The company also disclosed significant operating-lease commitments, totaling $671.3 million, and stated that ordinary-course legal matters were not expected to have a material effect; outcomes and insurance coverage remain uncertain.
The company reported effective disclosure controls and management concluded internal control over financial reporting was effective. The external auditor issued an unqualified opinion on the consolidated financial statements; it did not audit internal control effectiveness.
Important facts for investors to verify
- How much of 2013 growth reflects acquisitions versus comparable-center enrollment, pricing, and organic expansion.
- The sustainability and composition of adjusted EBITDA and adjusted net income, including the substantial 2013 adjustments.
- Debt-service capacity, variable-rate exposure, covenant headroom, and refinancing or maturity risk, alongside the working-capital deficit.
- Acquisition integration, center utilization, expected 2014 capital spending, and the basis for management’s cash-flow and center-growth expectations.
- Exposure to staffing costs, licensing and safety incidents, insurance adequacy, foreign exchange movements, and long-term lease obligations.
- Governance and ownership implications of Bain Capital affiliates’ controlling stake and the company’s stated lack of near-term plans to pay dividends.