Bright Horizons Family Solutions Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Bright Horizons provides center-based child care and early education, back-up care, and educational advisory services, primarily under multi-year employer contracts. It operated 1,079 centers at quarter-end, versus 1,051 a year earlier.
Financial performance
- Revenue: $501.8 million, up 8%. Full-service child care revenue rose 7% to $418.3 million; back-up care rose 18% to $64.7 million; educational advisory services rose 15% to $18.7 million.
- Profit and margins: Gross profit was $126.9 million, up 12%; gross margin increased to 25.3% from 24.5%. Operating income was $62.9 million, up 14%, with operating margin of 12.6% versus 11.9%. Net income was $42.0 million, up 13%; diluted EPS was $0.71 versus $0.62. Net margin was 8.4% versus 8.0%.
- Non-GAAP measures: Adjusted EBITDA was $93.8 million, up 13%; adjusted net income was $47.8 million, up 12%; diluted adjusted EPS was $0.81 versus $0.72. These are management-defined non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Operating cash flow was $107.0 million versus $105.8 million. Investing used $60.6 million, including $24.2 million in fixed-asset purchases, $19.5 million for acquisitions and approximately $20.0 million for debt securities. Financing used $62.3 million. Cash, cash equivalents and restricted cash ended at $23.2 million, versus $33.8 million a year earlier.
- Liquidity and debt: Cash and cash equivalents were $20.1 million. Term-loan borrowings were $1.054 billion; revolving borrowings were $50.2 million, leaving $174.8 million available under the $225 million revolver. The company reported a $326.6 million working-capital deficit, partly reflecting lease accounting adoption, and said it expected available cash, operating cash flows and revolver capacity to meet planned needs for at least 12 months under current conditions.
- Taxes and interest: Net interest expense rose to $11.9 million from $11.5 million. The effective tax rate was 17.5% versus 14.8%, including $4.6 million of excess tax benefits from stock-based compensation; without those benefits, the rate was approximately 26%.
Material changes and drivers
- Revenue growth reflected new and ramping centers, enrollment gains, expanded back-up care and educational advisory services, acquisitions, and annual tuition increases of 3%–4%. Full-service enrollment increased approximately 6%.
- Gross and operating margins improved with enrollment growth, contributions from new and acquired centers, and cost management. Higher personnel, technology, care-provider and occupancy costs partly offset gains.
- Foreign exchange rates reduced full-service segment revenue by approximately 2%. Management cited variable enrollment and staffing, center openings and ramp-up, client launch timing, contract mix, competition and economic conditions as sources of quarter-to-quarter variability.
- ASC 842 lease adoption on January 1, 2019 added $644.3 million of right-of-use assets and initially recognized $705.7 million of lease liabilities. Comparative periods were not restated; adoption did not affect income or cash flows.
- The company acquired one U.S. center and one U.K. back-up care provider for $19.5 million net of acquired cash. Up to $19.7 million of contingent consideration may be payable based on future performance; the preliminary recorded fair value was $16.4 million.
Outlook, risks and contingencies
- Management estimated an overall weighted-average interest rate of approximately 4.0%–4.5% for the remainder of 2019 and a 2019 annual effective tax rate of approximately 22%–24%; both are estimates, not earnings guidance.
- The company uses $500 million of interest-rate swaps to mitigate variable-rate exposure. It was in compliance with financial covenants at March 31, 2019. The term loan’s remaining principal is due at maturity in November 2023; the revolver matures in July 2022.
- Lease liabilities totaled $716.4 million at quarter-end, and additional leases not yet commenced represented $96.1 million of payments. Future lease commitments and center-opening costs are significant obligations.
- Management identified seasonality, wage and staffing costs, enrollment, new-center ramp-up, interest rates, foreign exchange, acquisition integration, tax matters and general economic conditions as risks or uncertainties. It reported no material change to the risk factors in its 2018 Form 10-K.
- Ordinary-course legal claims are pending; management did not expect their resolution to materially affect results, but noted insurance may not cover all liabilities. Unrecognized tax benefits were $5.4 million; possible changes over the next 12 months were estimated at zero to $2.5 million, excluding interest and penalties.
- The $300 million share-repurchase authorization had $259.0 million remaining. No shares were repurchased under the program during the quarter; shares retired for equity-award tax withholding were not program repurchases.
Important facts for investors to verify
- Whether revenue and enrollment growth, particularly in back-up care and new or ramping centers, continues to translate into sustainable margins.
- Cash generation relative to capital expenditures, acquisitions, debt service, and the substantial lease commitments; note that the working-capital deficit includes the lease-standard transition.
- Exposure to floating interest rates, covenant headroom, and the effect of refinancing the large term-loan balance due in 2023.
- Acquisition contingent consideration, final purchase-price allocations, and integration performance.
- Tax-rate estimates and the contribution of stock-based compensation tax benefits to reported earnings.