Bright Horizons Family Solutions Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Bright Horizons provides center-based child care and early education, back-up dependent care, and educational advisory services. It operated 1,065 centers and served more than 1,100 employer clients at quarter-end.
Financial performance
- Q2 revenue: $489.7 million, up 10% from $445.5 million. Net income was $40.4 million versus $33.0 million; diluted EPS was $0.68 versus $0.54.
- Six-month revenue: $953.4 million, up 10%. Net income was $77.7 million versus $74.4 million; diluted EPS was $1.31 versus $1.22.
- Margins: Q2 gross margin was 25.7% (unchanged), operating margin 13.2% (up from 12.7%), and net margin 8.3% (up from 7.4%). For the first half, gross margin was 25.1% (down from 25.3%), operating margin 12.6% (up from 12.5%), and net margin 8.2% (down from 8.6%).
- Segment growth: Q2 full-service child care revenue rose 10%, back-up dependent care 10%, and educational advisory services 21%. Management cited enrollment growth, new and ramping centers, tuition increases, and expanded service sales.
- Cash flow: First-half operating cash flow was $188.7 million, versus $167.6 million. Investing used $89.8 million, including $50.6 million for acquisitions and $39.2 million for fixed-asset purchases. Financing used $99.8 million, principally including $85.7 million of share repurchases. Cash ended at $22.9 million, down $0.3 million from year-end.
- Debt and liquidity: Term-loan borrowings were $1.062 billion and revolver borrowings $112.3 million at June 30; $112.7 million remained available under the $225 million revolver. Cash was $22.9 million. The company reported a $309.0 million working-capital deficit. It was in compliance with financial covenants and said existing cash, operating cash flow, and revolver availability should cover planned needs for at least 12 months under current conditions.
Changes, outlook, and notable items
- Revenue growth was 10% in both the quarter and first half. Q2 operating income increased 14%; first-half operating income increased 11%. First-half adjusted EBITDA, a non-GAAP measure, rose 8% to $178.6 million; adjusted net income rose 15% to $93.5 million.
- First-half acquisitions added 27 centers across the Netherlands, United States, and United Kingdom for $50.6 million net cash consideration. Purchase-price allocations remained preliminary; acquired businesses’ results were not material.
- The company repurchased 0.8 million shares for $85.7 million in the first half. A new $300 million repurchase authorization took effect June 12; the full amount remained available at June 30.
- A May 31 credit-agreement amendment reduced applicable borrowing spreads. Total net interest expense nevertheless increased year over year, partly reflecting revolver borrowings. A $500 million term-loan balance was hedged with swaps at an approximately 3.90% fixed average rate through October 2021.
- Management expected a 2018 annual effective tax rate of approximately 21%–23%, subject to equity activity, international earnings mix, and further GILTI guidance. Revenue guidance or broader earnings guidance was not provided in the filing text.
- Management noted seasonal softness in child-care demand during summer and variability from enrollment, staffing, center openings and ramp-ups, acquisitions, and client launches. It expects adoption of the lease standard effective in 2019 to materially affect the balance sheet because of its real-estate leases. Adoption of the revenue standard had no material impact.
- Other considerations include variable-rate debt, foreign-currency exposure, credit-facility covenants, and the possibility that significant acquisitions or investments could require additional financing. The company reported no material change in risk factors and no off-balance-sheet arrangements. Ordinary-course legal claims were not expected by management to have a material adverse effect, though outcomes and insurance coverage are uncertain.
Important facts for investors to verify
- Whether enrollment, center ramp-up, wage and occupancy costs, and service-line growth sustain revenue and operating-margin trends.
- Debt costs, variable-rate exposure, swap effectiveness, revolver availability, and continued covenant compliance.
- Cash requirements for acquisitions, capital spending, and the $300 million repurchase authorization, particularly given the working-capital deficit.
- The final tax-rate outlook and remaining Tax Act/GILTI accounting, including the effect of equity-based tax benefits.
- The scale and timing of balance-sheet effects from the 2019 lease-standard adoption and the final purchase accounting for acquisitions.