Bright Horizons Family Solutions Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless otherwise noted. Bright Horizons provides center-based child care and early education, back-up care, and workforce education and advisory services, primarily through multi-year employer contracts. The filing is unaudited.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $390.8 million | $506.3 million |
| Gross profit / margin | $81.4 million / 20.8% | $108.9 million / 21.5% |
| Operating income / margin | $13.7 million / 3.5% | $43.3 million / 8.5% |
| Net income | $7.1 million | $30.7 million |
| Diluted EPS | $0.12 | $0.52 |
| Adjusted EBITDA (non-GAAP) | $46.3 million | $81.5 million |
| Net cash from operating activities | $68.3 million | $64.1 million |
Revenue fell 22.8%. Full-service center-based child care revenue declined 29.4% to $290.3 million; back-up care rose 3.0% to $76.4 million; educational advisory and other services rose 16.4% to $24.2 million. Full-service child care recorded an operating loss of $18.0 million, compared with operating income of $16.7 million a year earlier. Back-up care operating income increased to $27.2 million from $22.2 million.
Gross margin narrowed by about 0.7 percentage points, while SG&A rose to $60.1 million from $57.4 million and increased as a share of revenue to 15.4% from 11.4%. Lower enrollment and temporary center closures weighed on results. The 2021 quarter included $9.6 million of government support recorded as a reduction to cost of services. Q1 2020 included $5.0 million of COVID-related long-lived asset impairment and $0.7 million of other costs; the company’s adjusted measures exclude specified items and are non-GAAP.
Cash, debt, and liquidity
- Cash and cash equivalents were $442.1 million at March 31, 2021, versus $384.3 million at December 31, 2020; cash including restricted cash was $447.8 million. Working capital was $123.4 million.
- Cash from investing activities was $(22.3) million, including $17.9 million of fixed-asset purchases and $9.0 million for acquisitions. Financing activities provided $13.9 million. Cash increased by $59.4 million including restricted cash.
- Long-term debt, net, was $1.018 billion; term-loan principal was $1.032 billion. There were no revolver borrowings against the $400 million facility. The term loan matures in November 2023; the revolver matures in July 2022.
- Lease liabilities totaled $812.3 million, including $87.4 million current. The company also disclosed $24.5 million of fixed commitments for leases not yet commenced.
- The company reported compliance with its financial covenant at quarter-end. The temporary maximum first-lien gross leverage covenant was 7.50:1.00 for Q1; the maximum first-lien net leverage covenant of 4.25:1.00 resumes for the quarter ending June 30, 2021.
Material changes and management outlook
The pandemic continued to depress center enrollment and operations. The company operated 1,015 centers, compared with 1,094 a year earlier; approximately 900, or 90%, were open at March 31, 2021. Tuition revenue declined 32.9%, alongside a 35% enrollment decrease. Management reported modest enrollment improvement versus the prior quarter and expects re-enrollment and phased reopening to continue through 2021.
Management expects COVID-19 to continue adversely affecting results for the remainder of 2021. It gave no specific numerical earnings or revenue guidance. It said operating cash flow would remain affected during the enrollment ramp and anticipated using existing cash and, if needed, available revolver capacity to support operations. Management stated that cash, operating cash flows, and available revolver capacity should fund obligations for at least the next 12 months, while warning prolonged disruption could require additional financing that may not be available on reasonable terms.
The company acquired two centers and a camp/back-up care provider for aggregate cash consideration of $8.6 million, net of cash acquired, plus consideration payable; results were not material. It recorded a preliminary $6.5 million fair value for contingent consideration. The company made no share repurchases under its authorization during the quarter; 11,303 shares were retired for tax withholding on vested awards and did not count against the program.
Risks, contingencies, and unusual items
- Recovery depends on pandemic developments, restrictions, enrollment, client decisions, labor and economic trends, and the reopening or continued operation of centers. The company may decide not to reopen some locations.
- Government support reduced expenses by $9.6 million in Q1. The company cautioned that support may not continue at current levels or at all. It had $13.1 million receivable under support programs and $20.4 million of payroll tax deferrals at quarter-end.
- The effective tax rate was a benefit of 52.0%, substantially affected by excess tax benefits from stock-based compensation and low pre-tax income. The company reported $4.1 million of unrecognized tax benefits.
- A UK governmental investigation and potential health and safety charges relate to a July 2019 nursery incident. The company could not estimate a loss range and did not expect a material effect on consolidated financial position. Ordinary-course legal matters were also disclosed.
- Variable-rate debt exposes the company to interest-rate risk; swaps and caps provide partial hedging. A net pre-tax hedge loss of approximately $3.6 million was estimated for reclassification to interest expense over the next 12 months.
Important facts for investors to verify
- Whether enrollment and center reopenings recover as expected, and whether any temporarily closed centers remain closed or are permanently shut.
- How much future performance depends on government support and on continued client and family demand across the three segments.
- Liquidity and covenant headroom as the 4.25:1.00 net leverage covenant resumes in Q2 2021, alongside the 2023 term-loan maturity.
- The effect of lease commitments, deferred payroll taxes, and potential additional financing needs under a prolonged disruption.
- Final purchase-price allocations and contingent consideration estimates for recent acquisitions, and the outcome of the UK investigation and tax matters.