Bright Horizons Family Solutions Inc. — Q3 2016 Form 10-Q
Business and period: The company provides workplace child care, back-up dependent care and educational advisory services in the U.S. and several international markets. This filing covers the quarter and nine months ended September 30, 2016; financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $383.9 | $365.9 | $1,171.3 | $1,086.8 |
| Gross profit / margin | $91.5 / 23.8% | $85.4 / 23.3% | $291.6 / 24.9% | $267.9 / 24.6% |
| Income from operations / margin | $44.7 / 11.6% | $41.7 / 11.3% | $149.9 / 12.8% | $136.7 / 12.6% |
| Net income | $22.5 | $20.6 | $77.6 | $70.0 |
| Diluted EPS | $0.37 | $0.33 | $1.27 | $1.11 |
| Adjusted EBITDA (non-GAAP) | $69.7 | $64.7 | $222.8 | $205.0 |
Cash flow and liquidity: Nine-month operating cash flow was $165.0, up from $142.3. Investing used $72.8, including $50.5 of fixed-asset purchases and $22.3 for acquisitions; financing used $83.0. Cash was $19.5 at September 30, including $14.3 held outside the U.S. The company reported a working-capital deficit of $163.0, compared with $152.6 at year-end 2015, and said operating cash flow, cash balances and revolving-credit availability should cover planned needs for at least 12 months under current conditions.
Debt: At September 30, term-loan borrowings were $922.5 before financing costs and discount; reported total debt was $909.9, including $30.0 drawn on the $225.0 revolving facility. Term loans then matured in 2020. On November 7, 2016, after quarter-end, the company refinanced its term loans into a new seven-year facility: $925.0 was funded, with a further $200.0 available on a delayed-draw basis subject to conditions. The $225.0 revolver remained in place.
Material changes and management commentary
- Q3 revenue increased 5%; nine-month revenue increased 8%. Growth reflected enrollment gains, new and ramping centers, typical annual tuition increases of 3–4%, and expansion in back-up care and advisory services. The company operated 940 centers at quarter-end, versus 928 a year earlier.
- For the nine months, full-service center revenue rose 7%, back-up care 9%, and educational advisory services 23%. UK foreign-exchange movements reduced full-service revenue growth by approximately 2% for the nine-month period.
- Gross margin improved in Q3 and for the nine-month period. Management attributed operating-profit growth primarily to enrollment and tuition gains, contributions from new and acquired centers, and cost management. Back-up-care operating income declined slightly for the nine months amid technology and staffing investment and higher provider fees.
- The company acquired eight UK centers and a U.S. back-up-care provider during the nine months; their results were not material. Purchase-price allocations remained preliminary.
- The company repurchased 1.5 million shares for $95.8 during the nine months and replaced its prior authorization with a $300 million repurchase program in August.
Outlook, risks and unusual matters
- Management expected the 2016 effective tax rate to be approximately 34%. No broader numerical revenue or earnings guidance is provided in the filing.
- Results are seasonal: child-care demand generally falls during summer and rises around the school-year start; back-up-care usage can rise during school breaks and holidays. Enrollment, staffing, center openings and ramp-up, contract mix, acquisitions, competition and economic conditions may also cause quarterly fluctuations.
- Management cited an ongoing material weakness in IT general controls, involving user access and program-change management. Disclosure controls were deemed ineffective as of September 30, 2016; remediation was underway and expected to continue through 2016. Management stated the financial statements fairly present the company’s financial position and results.
- The company noted that significant acquisitions or facility investments beyond existing borrowing capacity could require additional financing, which may not be available on reasonable terms or at all. Debt covenants restrict certain actions; the specified leverage covenant was not required to be tested at quarter-end.
- Ordinary-course legal claims were pending; the company did not expect a material adverse effect but could not predict outcomes or assure insurance coverage would be adequate. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether revenue and enrollment growth, particularly at new and ramping centers, translates into sustained operating-margin and cash-flow improvement.
- The terms, pricing and capacity of the November 2016 refinancing and delayed-draw facility, and their effects on interest expense, leverage and acquisition capacity.
- Progress and testing results for remediation of the IT-control material weakness.
- Cash available for repurchases and investment given the working-capital deficit, debt obligations and ongoing capital needs.
- Final purchase-price allocations for 2016 acquisitions, and the exposure of results to seasonality and foreign-exchange movements.