Bright Horizons Family Solutions Inc. — Q1 2015 Form 10-Q
Period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. The company provides child care, back-up dependent care, and education-related workplace services in the U.S. and internationally. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $350.4 | $332.2 | +6% |
| Gross profit / margin | $86.6 / 24.7% | $77.1 / 23.2% | +12%; +1.5 percentage points |
| Operating income / margin | $42.8 / 12.2% | $34.0 / 10.2% | +26% |
| Net income | $22.5 | $16.0 | +40% |
| Diluted EPS | $0.35 | $0.24 | +$0.11 |
| Adjusted EBITDA (non-GAAP) | $65.5 | $57.3 | +14% |
| Operating cash flow | $47.3 | $51.6 | -$4.4 |
| Capital expenditures | $16.9 | $14.3 | +$2.6 |
Revenue growth reflected new and ramping centers, approximately 6% higher overall enrollment, 3–4% annual tuition increases, and expanded back-up care sales; foreign currency translation partly offset growth. Full-service center-based care revenue rose 5% to $300.3 million, back-up dependent care rose 11% to $41.6 million, and educational advisory services rose 11% to $8.5 million. The company operated 885 centers versus 881 a year earlier. Operating margin improved as revenue growth and enrollment gains outpaced service-cost growth. Net income also benefited from a lower effective tax rate, while higher debt increased interest expense.
Cash and cash equivalents were $123.7 million at quarter-end, up from $87.9 million at December 31, 2014. The company reported a working capital deficit of $18.3 million, improved from $56.3 million at year-end. Long-term debt carrying value was $910.1 million, plus $9.6 million current maturities; term-loan principal was $936.8 million before financing-cost and discount deductions. The $100 million revolver was undrawn and fully available. The term-loan effective interest rate was 4.09%; the company reported compliance with financial covenants.
Material changes and other notable items
- Operating cash flow declined despite higher net income, primarily because of timing-related working-capital changes. Investing cash use increased to $18.0 million, mainly for center additions, maintenance, refurbishments, and technology investments.
- Net income was $22.5 million, while foreign-currency translation produced a $16.9 million other comprehensive loss; comprehensive income was $5.6 million versus $17.6 million in Q1 2014.
- Interest expense rose to $10.1 million from $8.7 million, reflecting the additional $165 million of term loans issued in December 2014. Debt maturities are concentrated in 2020, with scheduled quarterly principal payments.
- The company acquired one U.K. center for $1.1 million; the acquired business was not material to results. It repurchased 14,298 shares for $0.7 million and had $249.3 million remaining under a new $250 million repurchase authorization.
- The Q1 2015 effective tax rate was 31.3%, versus 36.5% a year earlier, including a $1.3 million benefit from certain tax items. Management expected the full-year 2015 effective tax rate to approximate 35%.
Outlook, risks, and controls
The filing provides no specific revenue or earnings guidance. Management said operating cash flow, cash balances, and available revolver capacity were expected to fund planned operations and capital expenditures for at least the next 12 months under current conditions. Significant acquisitions or facility investments could require additional financing, which may not be available on acceptable terms. Management expects remediation work on the disclosed internal-control weakness to continue through 2015.
Results are seasonal: child care and school-related demand historically declines during summer, while back-up care usage and related costs can rise when schools are closed. Other cited operating sensitivities include enrollment and staffing, new-center ramp-up, center openings or closures, contract mix, competition, and economic conditions. Foreign-exchange movements affect international operations. The company reported no significant change in interest-rate or currency exposure since year-end and no off-balance-sheet arrangements.
Control issue: Management concluded disclosure controls were not effective as of March 31, 2015, due to a material weakness in user-access and program-change-management controls for certain financial-reporting systems. Remediation was ongoing; the weakness would not be considered resolved until controls had operated and been tested effectively. Ordinary-course legal claims were not expected by management to have a material adverse effect, but outcomes and insurance coverage cannot be assured. Risk factors were otherwise reported as unchanged from the 2014 Form 10-K.
Most important facts for investors to verify
- Whether center enrollment, new-center ramp-up, and back-up care growth continue to support improved margins.
- Cash conversion and capital spending trends, given lower operating cash flow and the working capital deficit.
- Debt service and leverage implications of approximately $920 million of debt carrying value, including the effect of interest rates and scheduled repayments.
- Progress and independent testing of remediation for the material weakness in financial-reporting controls.
- The sustainability of the lower quarterly tax rate and the status of pending U.S. and foreign tax audits and uncertain tax positions.
- Foreign-currency effects, seasonal demand patterns, and the pace and funding of share repurchases and acquisitions.