Bright Horizons Family Solutions Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, compared with Q1 2022. Bright Horizons provides employer-sponsored child care, back-up care, and workforce education services. It operated 1,076 centers and served more than 1,400 employer clients. The July 2022 acquisition of Australian operator Only About Children contributed to year-over-year growth.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $553.6 million | $460.4 million | +20.2% |
| Gross profit / margin | $121.6 million / 22.0% | $110.1 million / 23.9% | Profit +10%; margin down 1.9 percentage points |
| Operating income / margin | $30.6 million / 5.5% | $31.2 million / 6.8% | Down 1.7% |
| Net income | $8.1 million | $19.4 million | Down 58.1% |
| Diluted EPS | $0.14 | $0.33 | Down $0.19 |
| Operating cash flow | $67.3 million | $58.6 million | Up $8.8 million |
| Capital expenditures | $19.3 million | $11.6 million | Up $7.7 million |
Adjusted EBITDA, a non-GAAP measure, was $69.8 million, up 11%; adjusted net income was $28.3 million, versus $27.7 million. These adjusted measures exclude specified items and should not be viewed as substitutes for GAAP results or cash flow.
Revenue by segment: full-service center-based child care $430.2 million (+21.5%); back-up care $96.3 million (+19.2%); educational advisory and other services $27.1 million (+5.7%). Growth reflected the Australian acquisition, enrollment gains, pricing, and higher back-up care utilization.
Financial position and liquidity
- Cash and cash equivalents were $44.6 million at March 31, 2023; cash including restricted cash was $59.9 million.
- Term-loan principal was $980.0 million and revolving-credit borrowings were $44.5 million. The $400 million revolving facility had $350.3 million available, after borrowings and letters of credit.
- Operating lease liabilities totaled $900.6 million. Working capital deficit was $417.0 million.
- Net cash used in investing activities was $18.2 million; net cash used in financing activities was $41.0 million. The company reported compliance with its financial covenant at quarter-end.
Material changes, outlook, and risks
- Net income fell despite higher revenue, primarily reflecting higher interest expense and a 54.2% effective tax rate versus 19.5% a year earlier. Higher rates increased net interest expense to $12.9 million from $7.0 million; the company estimated an overall weighted-average interest rate of approximately 4.25% for the remainder of 2023.
- Gross margin was pressured by labor and other operating costs, inflation, and a $6.0 million prior-period value-added tax expense. The filing identifies this as an immaterial correction: $4.3 million was recorded in cost of services and $1.7 million in selling, general and administrative expense.
- Management reported continued year-over-year enrollment growth and expects occupancy to improve during the rest of 2023, with more modest improvement in the U.K. Enrollment remained below pre-pandemic levels, with labor-market challenges and economic conditions slowing recovery.
- Government support reduced cost of services by $21.6 million, down from $25.3 million in Q1 2022. Management expects less support in 2023 as most eligible programs are expected to end by September.
- The company expects operating cash flow, existing cash, and revolver availability to fund obligations for at least 12 months. Significant acquisitions, new facility investments, or renewed global health disruption could require additional financing, which may not be available on reasonable terms.
- Debt is variable-rate, partly mitigated by interest-rate caps. Other risks include foreign-exchange fluctuations, center enrollment and staffing recovery, and the execution and funding of long-term leases. Ordinary-course legal matters were not expected by management to have a material adverse effect; ultimate outcomes cannot be predicted.
Important facts for investors to verify
- How enrollment, occupancy, staffing costs, and segment margins progress as centers continue to ramp.
- Whether declining government support and the end of eligible programs affect center economics or reported results.
- The ongoing effect of variable interest rates, hedge coverage, scheduled debt payments, and covenant headroom.
- The treatment and any subsequent developments relating to the $6.0 million prior-period VAT correction and the elevated quarterly tax rate.
- Cash requirements for the Only About Children deferred consideration, leases, capital spending, and any future share repurchases; $198.3 million remained under the repurchase authorization.
- Non-GAAP reconciliations and assumptions behind adjusted EBITDA and adjusted net income; the filing notes these measures have limitations and may not be comparable across companies.