Bright Horizons Family Solutions Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Bright Horizons provides employer-sponsored child care and education, back-up dependent care, and related family and education services in the U.S. and several other countries.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $335.0 million | $308.7 million | $1,015.2 million | $899.6 million |
| Gross profit / margin | $72.9 million / 21.8% | $68.5 million / 22.2% | $233.1 million / 23.0% | $209.7 million / 23.3% |
| Operating income / margin | $33.0 million / 9.9% | $27.8 million / 9.0% | $109.6 million / 10.8% | $78.6 million / 8.7% |
| Net income (loss) | $15.4 million | $14.9 million | $53.1 million | $(11.3) million |
| Diluted EPS | $0.23 | $0.23 | $0.79 | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $55.3 million | $50.0 million | $177.1 million | $155.2 million |
Cash flow and liquidity: Nine-month operating cash flow was $121.3 million, essentially flat with $121.5 million a year earlier. Investing used $53.4 million, versus $180.5 million in 2013, when major acquisitions drove spending. Financing provided $12.1 million. Cash increased to $109.0 million from $29.6 million at year-end 2013. The company reported a $7.3 million working-capital deficit.
Debt: Term-loan principal was $776.2 million at September 30, with $760.6 million reported as total debt after unamortized financing costs and discount; long-term debt on the balance sheet was $752.7 million, excluding current maturities. The term loan’s effective interest rate was 3.75%. The $100 million revolving facility was undrawn and fully available. Debt matures in 2020, with most principal due at maturity. The company reported compliance with financial covenants.
Material changes and drivers
- Q3 revenue grew 9%; nine-month revenue grew 13%. Management attributed growth to new and ramping centers, enrollment gains, annual tuition increases of typically 3–4%, expanded back-up care, and acquisitions. Acquisitions contributed about $45.3 million of incremental nine-month revenue.
- Q3 operating income rose 19%; nine-month operating income rose 39%. Q3 gross margin declined 0.4 percentage points year over year, while nine-month gross margin declined 0.3 points. Operating margin improved in both comparisons, reflecting higher revenue and lower comparative overhead from prior-year charges.
- Nine-month 2014 net income compares with a prior-year loss that included a $63.7 million debt-extinguishment loss. Prior-year results also included a $7.5 million sponsor-agreement termination fee, a $5.0 million performance-based stock-compensation charge, and acquisition and secondary-offering costs. The 2013 comparison also included a $4.1 million U.K. tax benefit.
- Interest expense declined following the January 2013 refinancing. The effective tax rate was 37.6% for Q3 and 36.6% for the first nine months of 2014, compared with 19.6% and 31.1%, respectively, in 2013.
- Foreign-currency translation reduced Q3 comprehensive income by $16.6 million; the nine-month translation loss was $9.5 million.
Outlook, risks and other notable items
- No specific revenue, earnings, or other numerical guidance is provided. Management expects positive operating cash flow and believes cash, operating cash generation, and the undrawn revolver will cover planned operating and capital needs for at least 12 months under current conditions. Significant acquisitions or facility investments could require additional financing, which may not be available on reasonable terms.
- Demand is seasonal: center-based care demand typically rises at the start of the school year, while back-up care use can increase during school breaks and holidays. Enrollment, staffing, new-center ramp-up, acquisitions, sponsor payments, competition, and economic conditions may cause quarterly fluctuations.
- Key disclosed risks include service demand changes, recruiting and retaining qualified teachers and key staff, substantial indebtedness and covenant restrictions, acquisition integration, sponsor relationships, cost inflation and pricing, regulation, litigation and insurance exposure, competition, data security, and catastrophic events or pandemics. The filing reports no material change to the risk factors in the 2013 Form 10-K.
- Ordinary-course legal claims are possible; management does not expect their resolution to materially affect financial condition, results, or cash flows, but notes insurance may not cover all liabilities. The company reported no off-balance-sheet arrangements.
- The board authorized up to $225 million of share repurchases. Through September 30, 177,639 shares had been repurchased for $7.2 million and retired. The company completed three U.S. center acquisitions for $6.5 million during the first nine months.
Important facts for investors to verify
- Whether enrollment, new-center ramp-up, tuition increases, and back-up care growth continue to offset higher staffing, occupancy, and other service costs.
- Debt principal repayment requirements, variable-rate exposure, covenant terms, and capacity for acquisitions or continued repurchases.
- The sustainability and cash conversion of reported earnings; adjusted EBITDA is non-GAAP and does not represent cash available for debt service, capital spending, or distributions.
- Acquisition integration and performance, including preliminary purchase-accounting estimates for 2014 acquisitions and the contribution of prior acquisitions.
- Tax audit outcomes and unrecognized tax benefits, as well as foreign-currency effects and the company’s seasonal operating patterns.