Bright Horizons Family Solutions Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with FY 2016. Bright Horizons provides employer-sponsored child care and early education, back-up dependent care, and educational advisory services. At year-end it operated 1,038 centers with capacity for approximately 116,000 children. The filing reports three segments: full-service center-based child care, back-up dependent care, and other educational advisory services.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,740.9 million | $1,569.8 million | Up 11% |
| Gross profit / margin | $430.6 million / 24.7% | $390.8 million / 24.9% | Up 10%; margin down 0.2 percentage points |
| Income from operations / margin | $205.4 million / 11.8% | $197.2 million / 12.6% | Up 4%; margin down 0.8 percentage points |
| Net income / diluted EPS | $157.0 million / $2.59 | $94.8 million / $1.55 | Net income up 66% |
| Adjusted EBITDA (non-GAAP) | $323.6 million | $299.2 million | Up 8% |
| Operating cash flow | $236.3 million | $213.3 million | Up 11% |
| Capital expenditures | $88.1 million | $75.3 million | Up 17% |
Revenue growth reflected center enrollment gains, new and acquired centers, annual tuition increases generally of 3%–4%, and expansion of back-up care and educational advisory services. Overall enrollment in full-service centers increased 12%. The 2016 Asquith acquisition contributed approximately $80.1 million of incremental 2017 revenue.
- Segment revenue and operating income: Full-service child care: $1,457.8 million revenue and $130.3 million operating income; back-up dependent care: $224.3 million and $60.4 million; educational advisory services: $58.9 million and $14.8 million.
- Cash and liquidity: Cash was $23.2 million at year-end, including $21.2 million held outside the U.S. The company had a $268.2 million working capital deficit. Its $225 million revolving facility had $127.1 million drawn and $97.9 million available.
- Debt: Total debt, including current maturities and revolver borrowings, was approximately $1.184 billion, versus $1.141 billion in 2016. Term loans mature in November 2023; the revolver matures in July 2022. The company was in compliance with financial covenants.
- Margins and costs: Cost of services was 75.3% of revenue, versus 75.1%. SG&A rose 15% to $188.9 million and increased to 10.8% of revenue from 10.4%, reflecting personnel, technology, acquisition integration, financing amendment and secondary-offering costs.
Material changes and unusual items
- Net income rose much faster than operating income primarily because the effective tax rate fell to 3% from 34%. FY 2017 income tax expense was $4.4 million, compared with $48.4 million in 2016.
- The tax result included a $22.3 million net benefit from the Tax Act and $26.5 million of excess stock-compensation tax benefits following adoption of ASU 2016-09. The company also recorded a provisional $33.3 million reduction in deferred tax liabilities from the lower federal rate and an estimated $11.0 million transition-tax obligation; tax accounting was incomplete and estimates could change.
- The company recorded $3.7 million of losses on the disposition of its remaining three Irish centers, partly offset by an approximately $7.0 million tax benefit. It exited Ireland during 2017.
- Full-service operating income increased only $0.6 million, while back-up care operating income rose 5% and educational advisory operating income rose 49%. Consolidated operating margin declined despite revenue growth.
- Operating cash flow increased, while investing cash outflow fell to $105.3 million from $302.8 million, principally because acquisition spending declined. Financing activities used $123.9 million, including $162.2 million of share repurchases.
- Management reported that David Lissy became Executive Chairman and Stephen Kramer became CEO in January 2018.
Outlook, risks and contingencies
Management expected approximately 25 net new centers in 2018, cash from operations of $250–$275 million, fixed-asset spending of $90–$100 million, and interest payments of approximately $44–$46 million. The company expects positive operating cash flow and believes cash, operations and revolver availability will meet planned needs for at least 12 months under current conditions. No specific 2018 revenue or earnings guidance is provided.
Key risks include dependence on employer demand and contract renewals; recruiting and retaining qualified teachers amid wage pressure and staffing requirements; child safety, licensing, litigation, insurance and reputational exposure; substantial variable-rate debt and restrictive covenants; execution and integration of acquisitions; competition and the ability to pass cost increases through to customers; foreign-exchange exposure, Brexit-related uncertainty and international operations; and data security and privacy compliance. The business is seasonal, with child-care enrollment typically weaker in summer and back-up care use often higher during school breaks. A 100-basis-point increase in borrowing rates was estimated to add about $10.7 million to annual interest expense after giving effect to swaps as if effective for all of 2017. Swaps fixed the rate on $500 million of term debt at approximately 3.90% through October 2021.
The company reported no material expected impact from pending litigation, while noting outcomes and insurance coverage cannot be assured. It reported no off-balance-sheet arrangements. Long-term operating lease commitments totaled approximately $1.002 billion. The auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- How much of reported earnings growth is sustainable after separating operating performance from Tax Act and stock-based compensation tax benefits.
- Whether enrollment, pricing and center openings can support growth while staffing, wage and occupancy costs pressure margins.
- Debt repayment capacity, revolver utilization, covenant headroom and sensitivity to rising rates after hedging.
- Whether 2018 operating cash flow and capital-spending expectations are achieved, and how acquisition and repurchase spending affects liquidity.
- Final Tax Act accounting, including transition-tax calculations and any subsequent adjustments to provisional estimates.