Bright Horizons Family Solutions Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Bright Horizons provides employer- and family-focused child care, backup dependent care and educational advisory services in the U.S. and internationally. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Revenue | $402.1 million, up 9% | $787.4 million, up 9% |
| Gross profit / margin | $104.4 million / 26.0% | $200.2 million / 25.4% |
| Operating income / margin | $56.6 million / 14.1% | $105.2 million / 13.3% |
| Net income | $30.4 million, versus $26.9 million | $55.1 million, versus $49.5 million |
| Diluted EPS | $0.50, versus $0.43 | $0.90, versus $0.78 |
| Adjusted EBITDA (non-GAAP) | $80.8 million, versus $74.8 million | $153.2 million, versus $140.2 million |
Q2 revenue grew through new and ramping centers, acquisitions, enrollment gains, 3–4% annual tuition increases, and expansion in backup care and educational advisory services. Center-based care enrollment increased approximately 6%; the company operated 935 centers at quarter-end, compared with 922 a year earlier. Acquisitions contributed about $9.9 million of Q2 revenue and $23.9 million for the first half. Q2 gross and operating margins were broadly stable year over year; first-half gross margin also remained broadly stable.
Cash flow and liquidity: First-half operating cash flow was $146.9 million, compared with $115.0 million; investing cash use was $29.7 million, versus $64.2 million; financing cash use was $82.6 million, versus $62.4 million. Cash was $45.0 million at June 30, including $24.8 million held outside the U.S. The working-capital deficit was $169.8 million. Management said operating cash flows, cash balances and revolver availability should meet planned operating and capital needs for at least 12 months under current conditions.
Debt: Term loans were $924.9 million and revolver borrowings were $29.6 million, for approximately $954.5 million of gross borrowings before cash. The term loans mature January 2020, with most principal due then. In January 2016, the revolver was increased to $225 million and its maturity extended to July 2019; $195.4 million remained undrawn at June 30. The company reported compliance with financial covenants. Debt bears variable rates.
Changes, outlook and risks
- First-half net income rose about 11%; revenue increased 9%. Operating income rose 11%, while net interest expense increased modestly, partly due to revolver borrowings.
- First-half operating cash flow improved, primarily due to working-capital timing, lower cash tax payments and higher net income. Share repurchases used $94.9 million during the first half.
- On August 2, after quarter-end, the board authorized a new $300 million share repurchase program, effective August 5, replacing the prior authorization, under which $26.8 million remained available at June 30.
- Management expects the 2016 effective tax rate to approximate 35% and anticipates continued positive operating cash flow. No specific revenue or earnings guidance was provided in the filing.
- Management cited seasonality: child care demand typically declines in summer and rises around the start of the school year; backup-care usage and related costs can rise during school breaks and holidays. New-center ramp-up, staffing and enrollment, acquisitions, competition, economic conditions and foreign exchange can also affect results.
- Disclosure controls were deemed ineffective at June 30 because of an ongoing material weakness in IT general controls concerning user access and program change management. Remediation was expected to continue through 2016; management said the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- Other notable items: foreign-currency translation reduced first-half comprehensive income by $24.8 million; a U.K. acquisition remained subject to preliminary purchase-price allocation. The company reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether the IT-control material weakness is remediated and disclosure controls are subsequently assessed as effective.
- Center enrollment, new-center ramp-up, labor and occupancy costs, and whether margin performance holds as the business expands.
- Cash generation after capital spending and buybacks, working-capital needs, and the effect of continued repurchases on liquidity and leverage.
- Variable-rate debt exposure, refinancing or repayment needs ahead of the January 2020 term-loan maturity, and ongoing covenant compliance.
- Foreign-currency effects, acquisition integration and final purchase-price allocations; adjusted EBITDA and other adjusted measures are non-GAAP and should be considered alongside GAAP results and cash flows.