Bright Horizons Family Solutions Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Comparisons below are with the corresponding 2021 periods. Amounts are in U.S. dollars.
Business context
Bright Horizons provides center-based child care, back-up care, and workforce education services, primarily under multi-year employer contracts. At quarter-end, 99% of its centers were open; it operated 1,081 centers across five countries. On July 1, 2022, it acquired Australian child care operator Only About Children (OAC), with approximately 75 centers.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $540.2m | $460.3m | $1,491.0m | $1,292.7m |
| Gross profit / margin | $128.8m / 23.8% | $120.3m / 26.1% | $367.4m / 24.6% | $307.6m / 23.8% |
| Operating income / margin | $39.0m / 7.2% | $46.0m / 10.0% | $118.0m / 7.9% | $93.7m / 7.2% |
| Net income | $18.2m | $26.8m | $62.6m | $52.8m |
| Diluted EPS | $0.31 | $0.44 | $1.06 | $0.86 |
| Operating cash flow | Not presented for the quarter | $131.0m | $185.2m |
Q3 revenue grew 17%, led by back-up care (+30%) and full-service child care (+14%); OAC contributed $37.3m of quarterly revenue. Existing-center enrollment improved, but remained below pre-pandemic levels. Q3 operating income declined 15% as labor costs and $6.7m of OAC transaction costs weighed on results. Nine-month operating income rose 26%; adjusted EBITDA, a non-GAAP measure, was $226.5m versus $193.3m. Q3 adjusted EBITDA was $80.6m versus $79.1m.
Liquidity, cash flow, and debt
- Cash and cash equivalents were $32.6m at September 30, down from $261.0m at year-end 2021; cash including restricted cash was $51.8m.
- Nine-month cash from operations was $131.0m, down from $185.2m, primarily reflecting less favorable working-capital timing. Investing used $250.9m, principally due to $209.4m of acquisition spending. Financing used $89.5m.
- Term-loan principal was $988.0m and revolver borrowings were $113.0m; the company reported $281.8m available under its $400m revolving facility. It was in compliance with its financial covenant at quarter-end.
- Working capital deficit was $387.2m, compared with $81.9m at December 31, 2021. Management said cash, operating cash flow, and available revolver capacity should fund obligations for at least 12 months, while noting additional financing might be needed for significant acquisitions or investments.
Material changes and unusual items
- OAC consideration was approximately $310m; about $207m was paid at closing, with a further $106.5m due 18 months after closing. Purchase-price allocation remained preliminary. The acquisition added goodwill and lease obligations.
- The company recorded a $5.9m loss on Australian-dollar forwards related to the OAC acquisition. Nine-month interest expense was $26.7m; variable-rate borrowing exposure is partly managed with interest-rate caps.
- Share repurchases totaled $182.3m for 2.0m shares in the first nine months; $198.3m remained under the $400m authorization.
- Government support reduced cost of services by $68.6m in the first nine months, versus $32.2m in 2021; $4.6m of tuition support was recorded as revenue. The company expects less support in 2023 as programs are expected to end by September 30, 2023.
- Foreign currency translation contributed to a $93.1m nine-month comprehensive loss despite net income of $62.6m.
Outlook, management commentary, and risks
Management expected occupancy to continue improving through the remainder of 2022 and into 2023, while acknowledging labor-market constraints and continued recovery from COVID-19 disruptions. It cited investments in compensation, benefits, and educator development, and identified enrollment growth, staff recruitment and retention, pricing, inflation, service-line expansion, and acquisition integration as important to restoring and growing operating income. Management estimated an overall weighted-average interest rate of approximately 3.6% for the remainder of 2022 and expected rates to continue rising into 2023.
Key exposures include labor availability and wage inflation, occupancy recovery, foreign-exchange movements, rising variable interest rates, and the timing or continuation of government support. Management reported no material changes to the risk factors in its 2021 Form 10-K. Ordinary-course legal matters were not expected to have a material adverse effect, though outcomes and insurance coverage cannot be assured.
Investor verification priorities
- Track enrollment, occupancy, staffing levels, and labor costs at existing centers, and assess progress toward pre-pandemic performance.
- Monitor cash conversion and working capital, remaining revolver availability, debt service, and compliance with the leverage covenant.
- Verify the final OAC purchase-price allocation, deferred payment, integration costs, and acquired-center performance.
- Assess how expiration of government support, currency movements, and higher interest rates affect margins and earnings.
- Compare reported GAAP results with non-GAAP adjusted measures, including the transaction costs and foreign-currency loss excluded from certain adjustments.