Bright Horizons Family Solutions Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Bright Horizons provides employer-sponsored child care and education, back-up dependent care, and educational advisory services in the U.S. and internationally.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $308.7 million | $267.9 million | $899.6 million | $797.5 million |
| Gross profit / margin | $68.5 million / 22.2% | $60.1 million / 22.4% | $209.7 million / 23.3% | $182.7 million / 22.9% |
| Income from operations / margin | $27.8 million / 9.0% | $25.4 million / 9.5% | $78.6 million / 8.7% | $67.5 million / 8.5% |
| Net income (loss) | $14.9 million | $2.6 million | $(11.3) million | $4.3 million |
| GAAP diluted common EPS | $0.23 | $(3.05) | $(0.18) | $(9.75) |
| Adjusted EBITDA (non-GAAP) | $50.0 million | $44.3 million | $155.2 million | $133.8 million |
| Operating cash flow | Not separately presented | Not separately presented | $121.5 million | $92.6 million |
Financial position and material changes
- Q3 revenue rose 15.2%; management attributed growth to new and ramping centers, 3%–4% annual tuition increases, stronger back-up care sales, and acquisitions. Revenue from the 2013 acquisitions was about $26 million in Q3. The company operated 880 centers at September 30, versus 776 a year earlier.
- For the first nine months, revenue increased 12.8% and operating income increased 16.4%. The reported net loss mainly reflects a $63.7 million loss on extinguishment of debt from the January refinancing; operating income was higher and interest expense lower than in 2012.
- Q3 gross margin declined 0.2 percentage points and operating margin declined 0.5 points year over year, with higher costs and SGA spending. Nine-month gross and operating margins improved 0.4 and 0.2 points, respectively. Adjusted measures are non-GAAP and exclude specified items.
- Cash and equivalents were $35.0 million at September 30, 2013, compared with $34.1 million at December 31, 2012. Working capital deficit was $112.8 million, versus $65.9 million at year-end; management attributed the increase primarily to cash used for acquisitions.
- Operating cash flow was $121.5 million; investing cash outflow was $180.5 million, including $125.4 million for acquisitions and $55.2 million for fixed assets. Financing provided $60.0 million, including IPO proceeds and refinancing activity.
- At September 30, term loans outstanding were $784.1 million and revolving-credit borrowings were $20.6 million, with $79.4 million of revolver capacity available. The new secured credit facilities mature in 2020 (term loan) and 2018 (revolver); the reported effective rate on revolver borrowings was 5%. Refinancing reduced the weighted-average interest rate from about 8.5% at year-end 2012 to 4.2% at September 30, 2013.
Transactions, outlook and risks
- The company acquired Kidsunlimited, a U.K. operator of 64 nurseries, for approximately $69.0 million in April, and Children’s Choice Learning Centers, a U.S. operator of 49 centers, for approximately $54.2 million in July; it also completed two smaller acquisitions. The acquisitions added goodwill and intangible assets; purchase-price allocations remained preliminary.
- The January IPO generated $234.9 million net proceeds, used along with new term-loan proceeds to refinance prior debt. The company also completed a June secondary share offering, from which it received no proceeds. Class L shares converted into common stock in January. Bain Capital-affiliated funds held approximately 64.3% of common stock at September 30.
- Management expected positive operating cash flow and stated that cash, operating cash generation and available revolver capacity should fund planned operations and capital spending for at least 12 months under current conditions. Significant acquisitions or facility investments could require additional financing. The filing gives no specific earnings or revenue guidance.
- Management noted seasonal demand fluctuations: center-based care demand typically declines during summer and increases around the start of the school year; back-up care use can rise during school breaks and holidays. Key risks include demand changes, hiring and retaining qualified teachers, substantial debt and restrictive covenants, acquisition integration, cost increases, sponsor relationships, competition, regulation and licensing, insurance adequacy, litigation, data security and catastrophic events.
- The company said it was compliant with financial covenants at September 30. It reported ordinary-course litigation and believed resolution would not materially affect results, while noting insurance may not cover all liabilities. Self-insured medical and workers’ compensation claims and regulatory compliance could create additional costs. A U.K. tax inquiry was resolved, reducing unrecognized tax benefits; state tax audits were ongoing.
Important facts for investors to verify
- How much reported revenue and enrollment growth reflects acquisitions versus organic growth, and whether acquired centers meet integration and profitability expectations.
- Whether margins and cash generation remain resilient as staffing, occupancy, acquisition-integration and other operating costs rise.
- Debt service capacity, covenant headroom, refinancing terms and the company’s use of available revolver capacity, particularly if it pursues further acquisitions.
- The recurring versus one-time nature of adjustments used in non-GAAP results, including the debt-extinguishment loss, offering and sponsor-related costs, stock compensation and acquisition expenses.
- Whether working capital and liquidity improve, and whether management’s 12-month liquidity assessment remains valid if operating conditions or investment plans change.