Bright Horizons Family Solutions Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise stated. Amounts are in U.S. dollars. The company provides child care, backup dependent care and education advisory services in the U.S. and several international markets.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $332.2 million | $280.1 million |
| Gross profit / margin | $77.1 million / 23.2% | $65.8 million / 23.5% |
| Operating income / margin | $34.0 million / 10.2% | $15.4 million / 5.5% |
| Net income (loss) | $16.0 million | $(50.8) million |
| Diluted EPS | $0.24 | $(0.91) |
| Adjusted EBITDA / margin | $57.3 million / 17.3% | $48.5 million / 17.3% |
| Operating cash flow | $51.6 million | $52.3 million |
Revenue grew 18.6%, primarily from new and ramping centers, acquisitions, increased backup-care services and annual tuition increases of 3%–4%. Full-service center-based care revenue rose 18.5%; backup dependent care rose 13.0%; other educational advisory services rose 62.9%. The company operated 881 centers at quarter-end, versus 773 a year earlier.
Cost of services rose 19.0%, slightly faster than revenue, and gross margin declined 0.3 percentage points. Operating income improved substantially, but comparisons reflect unusual Q1 2013 charges, including a $63.7 million debt-extinguishment loss, a $7.5 million sponsor termination fee and approximately $5.0 million of performance-based stock compensation. Adjusted net income was $22.7 million, up from $15.6 million; these are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
Cash, liquidity and debt
- Cash and cash equivalents were $75.7 million at March 31, 2014, up from $29.6 million at year-end 2013. Operating cash flow was $51.6 million; investing activities used $14.1 million, including $14.4 million of fixed-asset purchases.
- Reported total current assets were $189.0 million and current liabilities $241.5 million. Management reported a working-capital deficit of $52.5 million, improved from $89.9 million at December 31, 2013.
- Term-loan principal was $780.1 million; debt carrying value after financing costs and original issue discount was $763.0 million. The term loan’s effective rate was 4.0%. Quarterly principal payments are approximately $2.0 million; the term loan matures in 2020.
- The $100 million revolving credit facility had no borrowings outstanding and was fully available. The company reported compliance with financial covenants at March 31, 2014.
- Management said existing cash, operating cash flow and available revolver capacity should cover planned operating and capital needs for at least the next 12 months under current conditions. Significant additional acquisitions or facility investments could require financing.
Changes, outlook and risks
- 2013 acquisitions Kidsunlimited and Children’s Choice contributed approximately $30.4 million of Q1 2014 revenue. The filing attributes growth to acquired and new centers as well as enrollment and service expansion.
- The board authorized a potential $225 million share repurchase program on March 28, 2014; no shares had been repurchased by quarter-end. The March 2014 secondary offering was a shareholder sale, and the company received no proceeds.
- No specific earnings or revenue guidance is provided. Management expects positive operating cash flow and continued selective acquisitions, subject to operating conditions and financing needs.
- Management cites seasonal demand and potential fluctuations from enrollment, staffing, center openings, acquisitions, sponsor payments and economic conditions. Risks include qualified-staff recruitment and retention, substantial debt and restrictive covenants, acquisition integration, sponsor relationships, competition, cost increases, regulation, litigation, insurance, data security and catastrophic events.
- The company reported ongoing tax audits, including an IRS audit of tax year 2011; it estimated potential changes to uncertain tax positions of zero to $1.0 million, excluding interest and penalties. Ordinary-course legal claims are disclosed; management did not expect their resolution to materially adversely affect results, while noting outcomes and insurance coverage are uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of revenue and operating improvement reflects acquired centers, organic enrollment growth, pricing and one-time comparison items.
- Whether gross-margin pressure persists as staffing, occupancy and integration costs rise.
- Debt repayment, interest costs, covenant headroom and liquidity needs if acquisitions or capital spending increase.
- The terms and execution of the $225 million repurchase authorization, including its potential effect on cash and leverage.
- Seasonality, tax-audit developments and any material changes in litigation or other contingencies.