Bright Horizons Family Solutions Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. The company provides early education and child care, back-up care, and education-benefit administration, primarily through multi-year employer contracts. At quarter-end, 989 of 1,019 centers were open, with capacity for approximately 114,500 children.
Financial performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $460.4 million | $390.8 million; up 17.8% |
| Gross profit / margin | $110.1 million / 23.9% | $81.4 million / 20.8% |
| Operating income / margin | $31.2 million / 6.8% | $13.7 million / 3.5% |
| Net income | $19.4 million; $0.33 diluted EPS | $7.1 million; $0.12 diluted EPS |
| Adjusted EBITDA (non-GAAP) | $62.8 million; 13.6% of revenue | $46.3 million; 11.8% of revenue |
| Operating cash flow | $58.6 million | $68.3 million |
Revenue growth was led by full-service center-based child care, up 21.9% to $353.9 million, including tuition revenue up 28% alongside a 27% enrollment increase. Back-up care revenue rose 5.9% to $80.8 million; educational advisory and other services rose 6.1% to $25.6 million. Full-service segment operating income improved to $7.2 million from a $18.0 million loss. Back-up care operating income declined 24.8% to $20.5 million, partly reflecting a shift toward traditional in-center and in-home care and related costs.
Cost of services rose 13%, slower than revenue growth, and gross margin improved by approximately 3 percentage points. SG&A increased 19% to $71.7 million, while remaining broadly stable as a share of revenue. Net interest expense fell to $7.0 million from $9.0 million. The effective tax rate was 19.5%, versus a tax benefit and a negative 52.0% rate in Q1 2021; the comparison was affected by stock-based compensation tax benefits and the differing level of pretax income.
Balance sheet, cash flow and capital
- Cash and cash equivalents were $257.2 million at March 31, 2022; cash including restricted cash was $261.8 million. Cash and cash equivalents were $261.0 million at December 31, 2021.
- Total debt was $988.7 million, including $972.7 million of long-term debt net of financing costs; the company had no revolving-credit borrowings and $400 million of revolving capacity available. Cash less total debt implies net debt of approximately $731.5 million, using reported cash and total debt.
- Working capital deficit was $77.5 million, compared with $81.9 million at year-end. Management attributes the deficit primarily to investment in fixed assets and acquisitions and share repurchases.
- Operating cash flow was $58.6 million. Investing activities used $9.4 million, including $11.6 million of fixed-asset purchases. Financing activities used $52.1 million, including $39.9 million for share repurchases and $13.9 million for contingent-consideration payments.
- The company repurchased 0.3 million shares for $39.7 million during the quarter; $340.9 million remained under its $400 million authorization. Quarterly principal payments were $4.0 million.
Developments, outlook and risks
Management said enrollment continued to improve but remained below pre-pandemic levels; it expected further occupancy improvement and increased traditional in-center and in-home back-up care use during 2022. The filing gives no specific full-year revenue or earnings guidance. Management said available cash, operating cash flow and revolving-credit capacity should fund obligations for at least the next 12 months, while noting that renewed COVID-19 disruption or significant acquisitions and center investments could require additional financing.
Government support remained a material factor in reported results: benefits reduced cost of services by $25.3 million in Q1 2022, versus $9.6 million in Q1 2021; $9.5 million and $2.9 million, respectively, also reduced employer operating-subsidy revenue. A further $2.0 million of tuition support was recorded as Q1 2022 revenue. These amounts should be considered when assessing the sustainability of margins and earnings.
Key risks and uncertainties include ongoing COVID-19 effects on enrollment, utilization and staffing; a challenging labor market and wage pressure; inflation and the ability to implement pricing; reliance on government support; variable-rate debt and interest-rate exposure; and execution of center ramp-ups, acquisitions and underperforming-center improvements. The company had interest-rate caps and reported compliance with its financial covenant at March 31, 2022. It reported ordinary-course legal matters and said their resolution was not expected to materially adversely affect financial position, results or cash flows, while noting outcomes cannot be predicted.
Subsequent event: On May 3, 2022, the company agreed to acquire Australian child-care operator Only About Children for AUD$450 million: AUD$300 million payable at closing and AUD$150 million deferred for 18 months. Closing was expected in Q3 2022, subject to conditions including regulatory approval and third-party consents. The purchase was expected to be funded with cash and revolving-credit borrowings; the company entered a foreign-exchange forward arrangement.
Other notable item: The financial module of a new ERP system was implemented January 3, 2022, changing certain processes and controls. Management said disclosure controls were effective and reported no other material changes to internal control over financial reporting.
Important facts for investors to verify
- How much of the improved operating performance reflects recurring enrollment recovery versus temporary government support, and how center occupancy and staffing develop through 2022.
- Whether back-up care segment margins recover as service mix and utilization continue to shift.
- The acquisition’s final funding, closing conditions, purchase-price adjustments, integration costs and effects on leverage and liquidity.
- Exposure to higher interest rates, the effectiveness and timing of interest-rate caps, and continued compliance with debt covenants.
- Cash conversion and working-capital trends, including deferred revenue movements, contingent-consideration payments and ongoing share repurchases.