Bright Horizons Family Solutions Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited results compared with the three months ended March 31, 2017. Bright Horizons provides child care and early education, back-up dependent care, and educational advisory services. It operated 1,051 centers at quarter-end and served more than 1,100 employer clients.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $463.7 million | $422.2 million | Up 10% |
| Gross profit / margin | $113.5 million / 24.5% | $104.9 million / 24.9% | Profit up 8%; margin down 0.4 percentage points |
| Operating income / margin | $55.3 million / 11.9% | $51.4 million / 12.2% | Up 8%; margin down 0.3 percentage points |
| Net income | $37.3 million | $41.4 million | Down 10% |
| Diluted EPS | $0.62 | $0.68 | Down 9% |
| Adjusted EBITDA (non-GAAP) | $83.2 million | $78.3 million | Up 6% |
| Operating cash flow | $105.8 million | $106.7 million | Down $0.9 million |
Revenue growth reflected new and ramping centers, enrollment gains, typical annual tuition increases of 3–4%, foreign exchange benefits in the U.K. and Netherlands, and expansion in back-up care and educational advisory services. Segment revenue rose 9% in full-service child care, 9% in back-up dependent care, and 26% in educational advisory services. Cost growth kept gross margin slightly lower; management cited wage and benefit increases, center ramp-up and occupancy costs, and technology investments.
Net income fell despite higher operating income, primarily because the prior-year quarter included larger excess tax benefits from stock-based compensation. The effective tax rate was 14.8% in Q1 2018 versus a 1.8% tax benefit in Q1 2017; excluding those stock-based compensation benefits, the company estimated rates of approximately 28% and 35%, respectively. Q1 2018 results also included $0.3 million of secondary-offering transaction costs.
Cash flow, liquidity and debt
- Cash was $20.3 million at March 31, 2018, down from $23.2 million at year-end; $19.0 million was held outside the U.S.
- Investing cash outflow was $29.5 million, including $16.7 million for acquisitions and $12.8 million for fixed-asset purchases. Financing cash outflow was $79.6 million, driven largely by $85.7 million in share repurchases.
- Term-loan principal was $1.064 billion and revolving-credit borrowings were $129.4 million. The $225 million revolver had $95.6 million available. The term loan matures in 2023; the revolver matures in 2022. Debt is primarily variable-rate, with $500 million of term-loan exposure hedged by swaps.
- Working capital deficit was $315.4 million, compared with $268.2 million at December 31, 2017. Management said operating cash flow, cash balances and revolver availability should cover planned operating and capital needs for at least 12 months under current conditions.
- The company was in compliance with its financial covenants at quarter-end. It reported no off-balance-sheet arrangements.
Outlook, risks and notable items
- Management expected the 2018 annual effective tax rate to be approximately 21%–23%, subject to equity-award activity, international earnings mix and further guidance on the new GILTI rules. Accounting for certain Tax Act effects remained incomplete.
- No specific revenue or earnings guidance was provided. Management expects positive operating cash flow and expects cash to support operations, debt service and share repurchases.
- The business is seasonal: child-care demand typically falls during summer and rises around the school year; back-up care usage can rise during school breaks and holidays. Enrollment, staffing, new center ramp-up, contract mix and client launches may also affect quarterly results.
- Interest-rate exposure remains, although swaps fix the rate on $500 million of term loans through October 2021. The company cited no material change in interest-rate or foreign-currency market-risk exposure from year-end.
- The company acquired ten centers in Q1 for $16.7 million net of acquired cash, with $4.0 million of consideration payable. It also paid a $23.1 million deposit for centers acquired in April. Preliminary purchase-price allocations remained open.
- The company repurchased 0.8 million shares for $85.7 million and had $34.9 million left under its $300 million authorization. A separate secondary offering was a sale by existing stockholders; the company received no proceeds from those sales.
- The company adopted the new revenue standard on January 1, 2018, with no material adoption impact. It anticipated that the lease standard effective in 2019 would materially increase balance-sheet assets and liabilities.
- Ordinary-course legal claims were not expected to have a material adverse effect, but the company cautioned that insurance may not cover all liabilities. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether revenue and enrollment growth translate into stable or improving margins as new centers ramp and labor, occupancy and technology costs rise.
- How much of reported earnings and future tax expense depends on stock-based compensation tax benefits and the final accounting for the Tax Act.
- Debt levels, variable-rate exposure, revolver availability and covenant headroom, particularly if acquisitions or buybacks continue.
- The returns and integration progress from acquired centers, including the April acquisition funded in part by the $23.1 million deposit.
- The future balance-sheet and operating effects of lease capitalization under the forthcoming lease standard.