Bright Horizons Family Solutions Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars unless noted.
Business context
Bright Horizons provides center-based early education and child care, back-up care, and educational advisory and other services, primarily through employer contracts. At quarter-end, it operated 1,014 centers across the U.S., U.K., Netherlands, and India; 992 centers (98%) were open. It reported three operating segments: full-service center-based child care, back-up care, and educational advisory and other services.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $490.3 million | $441.5 million | $950.8 million | $832.3 million |
| Gross profit / margin | $128.5 million / 26.2% | $106.0 million / 24.0% | $238.6 million / 25.1% | $187.3 million / 22.5% |
| Operating income / margin | $47.8 million / 9.8% | $34.0 million / 7.7% | $79.0 million / 8.3% | $47.7 million / 5.7% |
| Net income | $24.9 million | $18.8 million | $44.4 million | $25.9 million |
| Diluted EPS | $0.42 | $0.31 | $0.74 | $0.42 |
| Operating cash flow | Not separately stated | Not separately stated | $125.8 million | $135.7 million |
Q2 revenue rose 11.1% and six-month revenue rose 14.2%. For the first half, revenue growth included a 16.1% increase in full-service child care, 9.3% growth in back-up care, and 6.5% growth in educational advisory and other services. Adjusted EBITDA, a non-GAAP measure, was $83.1 million for Q2 and $145.9 million for the first half, versus $68.0 million and $114.2 million, respectively.
At June 30, cash and cash equivalents were $270.4 million ($276.7 million including restricted cash). Total debt was $985.0 million before unamortized financing costs and discounts; net carrying value was $985.0 million, including $969.0 million long-term debt and $16.0 million current maturities. No revolving credit borrowings were outstanding at quarter-end; the facility provided $400 million of availability. Working capital was negative $82.4 million. The company reported compliance with its financial covenant.
Six-month investing cash outflow was $23.1 million and financing cash outflow was $89.0 million. Financing uses included $72.6 million of treasury-stock purchases and $13.9 million of contingent-consideration payments. The company repurchased 0.9 million shares for $84.2 million during the first half; $296.4 million remained under its $400 million authorization.
Material changes and notable items
- Center-based child-care enrollment increased 16% in Q2 and 22% for the first half year over year, but management said enrollment remained below pre-pandemic levels. Reopening centers and higher enrollment improved segment margins.
- Operating results benefited from government support: $46.7 million reduced cost of services in the first half of 2022, compared with $17.0 million a year earlier. Of the 2022 amount, $16.0 million reduced employer operating-subsidy revenue; another $3.4 million of tuition support was recorded as revenue.
- Back-up care revenue grew, but segment operating income declined 12% for the first half as service mix shifted toward higher-cost traditional in-home and center-based care. Educational advisory and other services operating income also declined, reflecting personnel, marketing, and technology investment.
- Interest expense declined to $15.0 million for the first half from $18.6 million, while the effective tax rate increased to 23.6% from 10.9%, partly reflecting lower excess tax benefits from stock-based compensation.
- Foreign-currency translation reduced first-half comprehensive income: other comprehensive loss was $39.6 million, mainly from currency translation adjustments.
Outlook, risks, and contingencies
Management expected occupancy to continue improving through 2022 and into 2023, but gave no specific full-year revenue or earnings guidance in the supplied filing text. It cited pandemic-related disruptions, center staffing availability, a challenging labor market, wage and benefit costs, persistent inflation, and foreign-exchange movements as factors that could affect recovery and margins. Management said continued growth depends on enrollment recovery, pricing that offsets rising costs, cross-selling, acquisition integration, and improving underperforming centers.
On July 1, 2022, after quarter-end, the company acquired Australian child-care operator Only About Children for AUD$450 million. It paid approximately USD$207 million net of cash acquired, funded from cash on hand, and agreed to pay a further USD$106.5 million 18 months after closing. The company expected to draw on its revolver following the acquisition. Purchase accounting was preliminary and additional acquired-asset and liability details were not yet available.
Variable-rate debt exposes the company to rising interest rates; interest-rate caps provide partial protection. The company estimated an overall weighted-average interest rate of approximately 3.5% for the remainder of 2022. It also recognized $5.9 million of losses on Australian-dollar forward contracts related to the acquisition. Management believed cash, operating cash flows, and revolver availability would fund obligations for at least 12 months, while warning that renewed pandemic disruption or significant acquisitions and investments could require additional financing, which might not be available on reasonable terms.
Other disclosed exposures include operating lease commitments with $774.1 million present value of lease liabilities and $27.5 million of additional signed leases not yet commenced. Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes and insurance coverage cannot be assured. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether enrollment and center occupancy continued to recover, and the extent to which results still depend on government support.
- The sustainability of margin improvement given labor costs, inflation, center staffing, and the costlier back-up-care service mix.
- Post-acquisition cash, debt, revolver usage, deferred consideration, and integration performance for Only About Children.
- Cash generation and liquidity after share repurchases, capital spending, lease obligations, and acquisition funding.
- Exposure to variable rates and foreign currency, including the effect of the Australian acquisition and related hedges.
- How reported GAAP results compare with non-GAAP adjusted measures, which exclude items such as stock compensation, acquisition costs, and forward-contract losses.