Nov 5, 2014
Executives
David H. Lissy - Chief Executive Officer and Director Elizabeth J.
Boland - Chief Financial Officer and Principal Accounting Officer
Analysts
Ryan Leonard - Barclays Capital, Research Division Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division Dan Dolev - Jefferies LLC, Research Division Gary E.
Bisbee - RBC Capital Markets, LLC, Research Division Sara Gubins - BofA Merrill Lynch, Research Division Jeffrey M. Silber - BMO Capital Markets Canada Jeffrey Y.
Volshteyn - JP Morgan Chase & Co, Research Division Jeffrey P. Meuler - Robert W.
Baird & Co. Incorporated, Research Division Trace A.
Urdan - Wells Fargo Securities, LLC, Research Division Anjaneya Singh - Crédit Suisse AG, Research Division Alex Karpos - Goldman Sachs Group Inc., Research Division
Operator
Greetings, ladies and gentlemen, and welcome to the Bright Horizons Family Solutions Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. David Lissy, Chief Executive Officer.
Thank you, sir. You may begin.
David H. Lissy
Thanks, Jen, and greetings to everybody from Boston. We're certainly glad you voted to be with us today.
Joining me on the call, as usual, is Elizabeth Boland, our Chief Financial Officer. And before I kick off our formal remarks, I'm going to let Elizabeth go through the Safe Harbor matters.
Elizabeth?
Elizabeth J. Boland
Thank you, Dave. Hi, everybody.
As you know, our earnings release went out after the close of the market today and it's available on our website, brighthorizons.com, under the Investor Relations section. This call is being webcast and the complete recording will be available after the call.
The phone replay number is (877) 870-5176 or for international callers, it's (858) 384-5517, with conference ID number 13593208. The webcast version is also available under the Investor Relations section of our website.
So in accordance with Reg FD, we use these conference calls and other similar public forums to provide the public and the investing community with timely information about our recent business operations and financial performance, along with some forward-looking statements on our current expectations for future performance. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially.
These risks and uncertainties include our ability to successfully implement our growth strategies, including executing contracts for new clients, enrolling children in our centers, retaining client contracts and operating profitably in the U.S. and abroad; our ability to identify, complete and successfully integrate acquisitions and to realize the attendant operating synergies; our decisions around capital investment and employee benefits that employers are making; our ability to hire and maintain qualified teachers and other key employees in management; our substantial indebtedness and the terms of such indebtedness; and lastly, the other risk factors which was set forth in our SEC filings.
We will also discuss certain non-GAAP financial measures on this call, which are detailed and reconciled to their GAAP counterparts in our press release. So I will turn it back over to Dave for the review and update on the business.
David H. Lissy
Thanks, Elizabeth, and hello again to everybody who's joining us today. As usual, I'll kick things off.
I'll talk about our financial and operating results for this quarter. I'm going to review our outlook for the rest of this year, discuss some trends in the business and give you a little preview into 2015.
Elizabeth will then follow with a more detailed review of the numbers before we open it up to your questions. First, let me recap the headline numbers for the third quarter of 2014.
Revenue of $335 million was up 9% over the prior year, and adjusted EBITDA of $55 million was up 11%. Adjusted net income of $21 million was up 16% over the third quarter of last year, yielding adjusted earnings per share of $0.32, up from the $0.28 we reported in last year's third quarter.
Our revenue growth of $26 million this past quarter reflects continued strong performance across our suite of product offerings. Full service revenue was up $20 million or 7% over last year, as we lapped our acquisition of Children's Choice back in 2013.
Back-up revenues increased 13% to $43 million and net advisory services grew 27% to $9 million for the quarter. We added 10 new centers this quarter.
Some highlights included exciting expansion in the energy sector down in Houston, with full service centers for ExxonMobil and Shell at their new campuses, as well as new centers for Boston Scientific, Premier Manufacturing and Tufts University. We continued our long-term track record of growing operating income again this past quarter, as adjusted income from operations of $33 million expanded 30 basis points to 9.9% of revenue.
This is driven by a few factors, which include a continued positive enrollment trend in our mature class of P&L centers, which are up 2% over last year; price increases averaging 3% to 4%; contributions from the new and ramping centers; solid cost management; strong performance in our back-up and educational advising segments; and overhead leverage, including the synergies we realized from the 2013 acquisitions. These factors, which all create margin improvement, continued to be offset this past quarter by the losses associated with the class of lease/consortium centers we opened last year and continue to open this year.
While this headwind will decrease as these centers ramp up into 2015 and beyond, as we discussed in the past, the near-term losses dampen gross margins. As a reminder, on a fully ramped-up basis, these lease/consortium centers generate the highest margins of our full service center models.
Another factor affecting margins is our plan to fully realize the value and resulting margin improvement from the relatively larger-scale deals we completed last year. This is made up of several factors, including the ramp-up of centers that were immature at the time we acquired them, which we're pleased to see tracking to our expectations in terms of enrollment and performance.
The other factor is the impact of the cohort of underperforming centers we inherited as part of these deals. As we previewed with you last time, we expect to improve the performance of some of these centers over time.
In addition, we've either closed or expect to close a number of these centers. As a result, we would typically -- as we typically expect to close approximately 2% to 3% of centers as part of our normal course of business, this year's closure number will be slightly higher, around 30 centers.
It's important to note that while this strategy impedes somewhat net opening numbers in the short term, it is an accretive process as we had higher-performing new centers and prune the underperformers. Overall, I'm pleased with our strong operating performance through September and I remain very proud of the work of our team in achieving consistently strong results.
Given that we're in November, I wanted to take a few minutes to provide you with a view on what we're seeing in the market and in turn, how it affects what we expect for the remainder of this year and into 2015. As we close out this year, we expect to broadly deliver on the plan we set for ourselves at this time last year.
The selling environment for our services has improved over last year, and we are pleased with the results that we are presently achieving which position us well heading into 2015. Industry verticals that are particularly strong for us include technology, energy, higher education and health care.
It's now more common for us to begin new client relationships with more than one of our services, as employers have recognized our ability to touch more of their employees with services that help them to be productive. Our strategy to open new lease/consortium centers in urban ring locations is working, and we are seeing new centers both ramp up on plan and help us to deliver back-up care through Bright Horizons centers in key locations where the demand is the strongest.
While this is currently a short-term drag on gross margins, we fully expect this to be a strong value creator going forward. Back-up care and educational advising services both continued to experience strong take-up, with both new clients and by cross-selling to our existing clients.
On the acquisition front. We enjoyed an outsized year back in 2013, and as I said to you in the past, closing deals, both big and small, can be lumpy.
And that's been the case this year as we've delivered on our plan to open our new organic centers, but don't expect to achieve our targeted typical number of smaller acquisitions, which explains our lower number of overall new center openings as compared to our initial target we set last year. The good news here though is we built the pipeline and have good visibility into potential deal flow.
Based on our current view, we'd expect to return to a more typical run rate of acquired centers beginning in Q4 and into 2015. This translates into annual additions in the range of 15 centers which would be our target next year.
On the operating side, we're pleased to continue to see enrollment trends in our mature base of centers continuing to improve. This is particularly true in the U.S., where we suffered the greatest loss during the downturn and have steadily built this year and anticipate continued expansion in 2015.
Price increases continue to average 3% to 4% across our network, which are tracking ahead of center cost increases by roughly 1%. As we look ahead to next year, we anticipate a similar spread.
So all in for this year, we anticipate a top line growth that approximates 11% over 2013, which will in turn, drive improvement in adjusted operating income margin by 50 to 75 basis points. Thus our guidance for adjusted EPS for the full year in 2014 is in the range of $1.43 to $1.45.
As we look ahead into 2015, as I said earlier, our business is well positioned to continue to benefit from the positive trends and operating execution that have contributed to our strong performance this year. While we're not yet providing specific guidance for next year, based on how we're trending now, we're targeting revenue growth in 2015 to be in the range of 8% to 10%, and we expect to continue to drive strong earnings growth that translates to adjusted earnings per share growth that we expect to approximate 20% in 2015.
With that, let me hand it back over to Elizabeth to review the numbers with you in more detail and I'll come back to you during the Q&A. Elizabeth?
Elizabeth J. Boland
Great. Thank you, Dave.
So again, the top line revenue growth in the third quarter was $26 million. The full service business added $20 million on rate increases that averaged 3% to 4% and enrollment gains in our ramping centers as well as the mature class which grew 2%, as Dave mentioned.
Lastly, we had contributions from new centers that we've added since the third quarter of 2013. The back-up division and ed advisory services continue to grow the top line, both from new clients and from expanded utilization of services by the existing client base.
The gross profit increase was $4 million to $73 million in the quarter and the gross margin of 21.8% compares to 22.2% in 2013. Our back-up services and net advisory services both continue deliver strong gross margin performance that's in concert with their revenue growth.
On the full service side, performance also remained strong in our mature and ramping class of centers, as the steady pace of year-over-year enrollment gains, coupled with strong cost management, drives steady margin growth. Countering this positive trend is the continuing effect of a larger class of lease/consortium model centers that we've opened in 2013 and 2014 and the other items that Dave discussed.
Overhead in the quarter was $33 million or 9.8% of revenue compared to $31 million or 10.1% last year on an adjusted basis, which is also a 30-basis-point improvement. As we've previewed on prior calls, we've completed the integration of the 2013 acquisitions and are leveraging the investments that we've made over the past several years to support growth.
We expect to continue to leverage recurring overhead over time at levels similar to the 20 to 25 basis points we expect to ultimately realize in this calendar year. We generated operating cash flow of $17 million in the quarter and $121 million year-to-date.
After deducting maintenance CapEx of $8 million, our free cash flow for the quarter was $9 million. We ended the quarter with $109 million in cash and no borrowings outstanding under our $100 million revolver.
Now to quantify a few of our usual quarter end operating stats. At September 30, we operated 876 centers, with capacity of 99,900.
The mix of contract types remains consistent: 75% profit and loss arrangements and 25% cost-plus contracts. As is the average full service center capacity, which remains at 137 in the U.S.
and 76 in Europe. As Dave previewed, our updated projection for the full year 2014 anticipates revenue growth approximating 11% over 2013.
Growth breaks down as follows. Organic growth approximates 8% to 10%, including a 3% to 4% price increase.
That's about 1% to 3% growth from enrollment of our mature and ramping centers, 1% to 2% from new organic full service center additions and 1% to 2% growth from back-up and net advisory services. In addition, acquisitions this year add approximately 4%, which is primarily the lapping effect of the acquisitions that we completed in 2013.
Offsetting these increases are the effects of center closings, which includes both legacy organic centers, as well as acquired centers, approximating 2%. We expect income from operations in 2014 to approximate 11% of revenue, which is an expansion of 50 to 75 basis points from the 10.4% adjusted income from ops that we reported for 2013.
Going down the income statement on a couple of the other line items. We expect amortization expense to approximate $29 million for the year, including $20 million related to our May of 2008 LBO, and for depreciation expense to approximate $49 million to $50 million.
Our stock compensation expense is projected to be approximately $8 million and interest expense is $34 million for the year, assuming a continued 4% or so borrowing rate on our term loan and no borrowings under the revolver, which we would not expect to be required based on our cash flow generation. Lastly, we estimate that the effective or structural tax rate will continue to be in the neighborhood of 36.5% of our adjusted pretax income in 2014, which is consistent with the projected GAAP reported effective tax rate for the full year.
The combination of top-line tax -- sorry, the top-line growth and operating margin leverage leads us to project adjusted EBITDA to increase 15% to 16% to approximately $240 million for 2014. With adjusted net income in the range of $97 million to $98 million and 68 million estimated weighted average shares outstanding, we therefore estimate that adjusted pro forma EPS will approximate $1.43 to $1.45 for the full year 2014, which is an increase of 20% to 22%.
Lastly, for the full year, we project we'll generate $160 million to $165 million of cash flow from operations and $135 million to $140 million of free cash flow, net of the projected maintenance capital spending of around $25 million. Based on the centers we have in development to slate -- and slated to open in 2014 as well as early 2015, we expect to invest approximately $35 million to $40 million in new center capital.
And all of that would be funded from operating cash so that we end the year with approximately $100 million to $110 million in cash on hand. Looking briefly at Q4 specifically, we continue to see steady year-over-year enrollment growth at this important time of the year, when we're rebuilding enrollment from the typical seasonal dip in Q3.
We've now lapped our 2013 acquisitions, and as Dave mentioned in his remarks, we've completed fewer acquisitions this year than our original target contemplated. They'll have a lower increment coming from new acquisitions this year.
Our outlook for adjusted EBITDA is therefore $62 million to $64 million for Q4 and adjusted net income is in the range of $25 million to $26 million, with adjusted EPS ranging from $0.37 to $0.39 for the fourth quarter of '14. So after that detailed review, Jen, we are ready to go to Q&A.
Operator
[Operator Instructions] Our first question comes from the line of Manav Patnaik with Barclays Capital.
Ryan Leonard - Barclays Capital, Research Division
This is actually Ryan, filling in for Manav. I just want to touch a little bit -- I just want to touch on the M&A a little bit.
Is that more of a factor of the right deals not being there, prices being a little higher, just kind of absorbing the past deals. Just want to get a little bit more insight in what gives you confidence going into next year.
David H. Lissy
Yes. I think, as I've said earlier, I think timing on these have always been somewhat unpredictable.
And I think coming off a year where we did a couple of larger deals and spent a lot of time focusing on getting them integrated and getting them done, the pipeline on the smaller deals requires a lot of volume in order to yield results because we take a look at a lot of things and a lot of things don't fit our criteria, either on quality or on valuation. So I think we found ourselves later in the year trying to get stuff to move and the timing on that sort of pushed out.
So I think -- I don't think you'll see us move much on price in terms of the deals that we end up doing. And I think we have visibility, as I said earlier, beginning in Q4 on some smaller things.
The timing is always a question of exactly when they'll close, but enough to sort of to see that we're sort of back on track with what I would call a more predictable run rate.
Ryan Leonard - Barclays Capital, Research Division
Great. That's perfect.
And just on ed advisory. Obviously, a great growth number against a tough comp in 3Q and the comp's almost identical in 4Q.
Is it something we should expect, the same type of growth in the fourth quarter?
David H. Lissy
I think growth in the ed advisory segment in the 20s is probably the right sort of view as we go into Q4.
Operator
Our next question comes from the line of Jerry Herman with Stifel.
Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division
Dave, I was wondering if you could quantify the losses on the consortium centers, either in absolute or the margin impact. And the basis for that question is really, if you're trending in a way that makes that a bigger piece of the business, will that be a sustainable item, i.e., the dilution from that activity?
Elizabeth J. Boland
So I'll just jump in with the first part of the question, at least, Jerry, and see if we can answer the question, if I'm understanding it right. The dilution from the lease/consortium classes in the neighborhood of about $8 million or so, in margin, so it's a margin loss, a headwind, and the centers that opened in 2013 are beginning to contribute.
Depending on the timing of when they opened, there's some continuation of that loss as they ramp up, although they get to break even at around 15 to 18 months' time frame. So the fact that we've made 2 years of investments in this, and this is part of our base growth strategy, we see as building the right long-term contribution.
Just as a reminder that the base business for these lease/consortium centers has centers in the range of $1.5 million on average in revenue. But the newer centers that we've been opening over the last 3 years, 4 years are more like $2 million to $3 million of annualized revenue when they are at fully ramped-up enrollment levels.
So they're much, much larger. And then the contribution from them in the 25% range puts the dollars that they deliver to the bottom line as much more substantial.
So it just takes a little bit of time for them to get to that full ramped-up level, which we'll see some of the 13 centers getting to that level in '15. But it's really the building up of the classes year-over-year that give us the view that longer term, they are good margin contributors.
Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division
Great. And I know that your cross-sell opportunity is an important one for you guys.
And some of the newer businesses, they're still pretty small. But help us with regard to the penetration of multiple-service clients.
I think previously, that was around 15%. Is the needle moving on that at all?
David H. Lissy
Yes, Jerry, the needle is moving in the right direction. The challenge on the sort of percentage is the denominator continues to grow as we bring in new clients that have just one of our services.
So in absolute numbers, the number of clients that now have multiple services continues to grow. Maybe to add some more color to that, I would tell you that 1 out of every 2 new EdAssist clients that we add or ed advisory clients that we add is an existing client.
So we sort of, for every 2, we're getting 1 that's a cross-sell and 1 that's a new one. And I think that if you look at the new clients and the sales that we're now achieving, it's roughly half of the new sales clients are starting with more than one of our services to begin with.
So the trends are all moving in the right way. That said, there still remains good white space.
So it's not like -- I think the trends are all moving positively, but I think we still have several hundred clients that we circle up as having the opportunity for -- to have at least 1 if not more of our other services.
Jerry R. Herman - Stifel, Nicolaus & Company, Incorporated, Research Division
Great. And just one real quick one, then I'll turn it over.
How about customer count in each of those businesses at this point?
Elizabeth J. Boland
So we have -- we've got more than 600 back-up clients, more than 120 ed advisory clients and on the full service side, it's like 400, 450 or so. We're in the neighborhood of north of 1,000 clients now.
Operator
Our next question comes from the line of Dan Dolev with Jefferies & Company.
Dan Dolev - Jefferies LLC, Research Division
Quickly, on the revenue, 11% versus, call it, 11.5% at the midpoint. Is that just a result of lower M&A or is there something else that you didn't think about earlier in the year that happened?
David H. Lissy
Yes. I think when we guided, the last time we guided to 11 to 12 and, Dan, we're sort of timing, as I said earlier, on some of the smaller deals can move that, swing that a little bit one way or the other.
We're sort of projecting that what -- if anything gets done this year, it will be a little later than we thought initially. So it just drops down to approximate 11%.
No other change in our projections.
Dan Dolev - Jefferies LLC, Research Division
Got it. And can you quantify maybe the organic growth in the full center -- full service centers in Q3 versus what you expect in Q4?
Elizabeth J. Boland
I'll have to take that offline, Dan, and get that quantified for you.
Operator
Our next question comes from the line of Gary Bisbee with RBC Capital Markets.
Gary E. Bisbee - RBC Capital Markets, LLC, Research Division
So I guess a couple of questions. I guess the key thing to this ongoing, how much dilution or accretion in the margin there is from the lease/consortium is do you open the same number every year?
Or do you plan to keep growing the number you open such that the absolute dollar amount of dilution would grow? Should we think of it -- I think last year and this year, if I remember correctly, it was about the same number.
Is that a number you think you'd likely target opening in 2015 and 2016, or should we think that you probably keep growing that number in absolute terms that you open each year such that we might not get to this point where the margins really start rising from that dilution leveling off and declining?
Elizabeth J. Boland
So I think in broad strokes, Gary, we would typically plan for them to be a similar proportion of our gross openings year-over-year. So it would rise modestly year-over-year.
But I think where the margin velocity comes in is that because of a 3-year ramp-up stage, ultimately, the lease model consortium centers are lapping each other as well. So they're layering in a more profitable level and will have only 1 year or 1.5 years' worth of headwind at a time once we get to this level of more than -- this is just the second year of a little bit more of a stepped-up program.
So we get into '15 and we'll see the contribution start to come in from those we opened in '13.
Gary E. Bisbee - RBC Capital Markets, LLC, Research Division
I just -- I go back and it seems to me like we should be seeing this now or at least, a lessening of the -- based on when you started talking about this in 12 to -- or I'm sorry, 15 to 18 months to break even, I'm surprised that it's not incrementally less of a drag yet. I guess you're talking the first half of '15, is that the right timing?
Elizabeth J. Boland
Yes. I mean, I think that we're seeing, in our own outlook, we would see some better contribution coming in, in Q4 from the cohort already, Q4 this year and then starting to see it contribute more next year.
I just -- I think that from a -- when we -- I think when we see the entire view roll up with all the growth and the timing of when the centers that are slated to open in '14 are coming in, we'll be able to be more precise about that. But I think conceptually, we should see it beginning to convert next year.
Gary E. Bisbee - RBC Capital Markets, LLC, Research Division
Okay, great. And then Dave, you said the selling environment has improved year-over-year.
Are you referring to the commentary you made about better success cross-selling and selling more services to new clients? Or was that -- what went into that?
And I guess, is that a relevant statement as well for the full service center business?
David H. Lissy
Yes. When I look across the suite of solutions and I look at -- we're in a -- we've been in a time now we consider to be sort of our prime sale season, which tends to be late summer into fall, as clients make decisions for 2015, and in some cases, even later on in 2015, and I would say that what we're witnessing, both in the full service center business and the back-up side and also in educational advising, it's just good momentum in terms of -- both in terms of activity but also in terms of close rates.
So compared to what I saw last year, I've been asked over time to describe the sales environment post-downturn and compare it to what we experienced in years before, and I've always described it as sort of a schizophrenic recovery. And I'm still not ready to describe the environment that we sell into today as being like it was pre-downturn.
But I can certainly say with confidence that it's better than it was this time last year.
Gary E. Bisbee - RBC Capital Markets, LLC, Research Division
Okay, great. And then just lastly, any sense on how we should think about the FX impact.
I guess it's mostly in the pound, with a touch of euro. And it's mostly in the full center business for the bid and back-up.
Is that the right -- I mean, 0.5 point or something like that drag the next few quarters if rates stay where they are, does that sound about right?
Elizabeth J. Boland
Yes. I mean, it's probably -- that's probably the right way to think about it as it starts to taper down from the earlier part of this year.
Operator
Our next question comes from the line of Sara Gubins with Bank of America Merrill Lynch.
Sara Gubins - BofA Merrill Lynch, Research Division
Just to follow up on some of the revenue and margin discussion. The fourth quarter guidance suggests revenue growth of a little over 5.5%, which is pretty good slowdown.
Is that really just your lapping the acquisitions and you're not getting as many new tuck-in acquisitions in the near-term as you might have expected? Or is there anything else in that?
David H. Lissy
I don't really think there's much in that, Sara, other than what we've talked about earlier, which is as we thought about the year before and saw it coming out this -- we're not seeing some of the contributions coming from the acquisitions that we had hoped in Q4. And again, as we looked out and tried to provide you a little bit of view into what we'd see happening as we head into 2015, I think we have a view towards Q1 and beyond in 2015 to return to a more normalized 8% to 10% top-line growth.
Sara Gubins - BofA Merrill Lynch, Research Division
And should we see revenue growth then kind of ramp throughout 2015 just as those new tuck-in deals get layered in?
Elizabeth J. Boland
I think we're not providing quarter-to-quarter trending. I think it's a little premature to say, Sara.
Sara Gubins - BofA Merrill Lynch, Research Division
Okay. And then the fourth quarter margin guidance actually suggests pretty significant leverage in the fourth quarter.
Is that help from lease/consortium maturing or is it something else?
Elizabeth J. Boland
Well, there's a number of elements, I think, from a time of year, there is the lease/consortium contributions is part of it. I think it's the contributions from the back-up and ed advisory businesses as they continue to contribute and mature, and just the centers that we have opened and are ramping up that are getting to a level where they make a difference.
I think we've alluded to the closings as well in the prepared remarks, and as you know, I think centers that closed also were often underperformers. And so to the extent that we have exited programs that have been a drag on margins, that is an element of headwind, not just because of having to grow against it but when those centers are underperforming, they drag down the margin.
So that's another factor. It's not a huge factor, but it certainly helps.
Sara Gubins - BofA Merrill Lynch, Research Division
Great. Okay.
And then just last question. Could you talk about retention levels that you're seeing as kids age up and how it compares to last year?
David H. Lissy
Yes. I think that we're seeing similar trends in terms of retention within the centers.
I think children stay with us an average of 3 years in our centers and that really hasn't changed much, Sara. I think, obviously, as Elizabeth talked about in her prepared comments, part of our continued enrollment trend was to be sure that we had -- and this is kind of a critical time where we rebuild the enrollment that we lost in the preschool over the summer, and based on what we saw this quarter and what we -- our visibility into Q4, we see that the trend there continuing to be a positive trend in terms of growth and recovering -- both recovering the enrollment but also maintaining the growth in enrollment that we've achieved so far this year.
Operator
Our next question comes from the line of Jeff Silber with BMO Capital Markets.
Jeffrey M. Silber - BMO Capital Markets Canada
Dave, you started off the conversation by thanking us for voting on to be on this call. I'm just wondering, [indiscernible] are there any issues in the state elections today that we need to be aware of that might impact your business?
David H. Lissy
First, I'm glad you picked that up, Jeff. I'm trying to be subtle.
The -- no, I don't think that we have much out there. There are in some localities on, I think, ballot initiatives around minimum wage at local levels.
But as we've talked about before, minimum wage is really not a big threat for us in the sense that our salaries are -- there are some distance between minimum wage and our wages. So I think that's -- that would be one out there that's there but won't have much of an effect on us.
And so no, I think broadly, I would say the answer is very little effect, if any at all.
Jeffrey M. Silber - BMO Capital Markets Canada
And nothing going on in the universal pre-K area?
David H. Lissy
Nothing more than what we've already talked about. Obviously, we're watching New York and we've chosen not to participate, as I've talked about before, for a year to just kind of see how that plays out.
And whether or not that becomes something we want to participate in going forward, we'll monitor it. And in other localities, we do participate in Georgia and in Florida, as we've said before.
And certainly, there are places where that conversation is definitely a topic, not on the ballot per se but just as an issue. And as we always do, we try to participate in those discussions as that's being aired, whether it's at a state level or a city level around the country.
Jeffrey M. Silber - BMO Capital Markets Canada
All right, great. And Elizabeth, I know you're not giving official guidance for next year.
But any gauge on what capital spending will be in 2015?
Elizabeth J. Boland
Probably pretty similar to this year's spending based on the sort of the typical protocol that we have on the new center openings and maintenance CapEx. So I'd say it'd be in a similar range, in the $80 million total for new center business and maintenance.
Operator
Our next question comes from the line of Jeff Volshteyn with JPMorgan Chase.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
For 2015, it seems that you expect some level of margin expansion. At this point, are you able to update sort of the longer-term margin target given the larger percentage of consortium centers?
David H. Lissy
Jeff, I think you're right by the broad guidance we gave that we do anticipate margin expansion in 2015. But at this point, as I said earlier, we're not going to give -- we'll wait until February to give the more specific guidance, as we typically do.
Elizabeth J. Boland
And I think just to tack on to that, I think from then, we can also update what we've provided sort of the longer-term view of how that plays out over time as we continue to ramp up our mature centers to their pre-downturn levels of enrollment and how that sort of stabilizes in the margin.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
Understood. And I have a few numbers questions, and I apologize if I repeat myself, I missed the portion on the call.
The -- what is the number of centers that were closed in the third quarter?
Elizabeth J. Boland
So we opened 10 and closed 16.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
Okay. And what is implied in your fourth quarter guidance as the year-end center count?
Elizabeth J. Boland
So overall, we would expect to open 8 to 10 or so in the fourth quarter and close a total of 30 for the year. So that implies around 2.
So I think the range is 30, 33, 35 centers open for the year and a net closures of 30. So it would be net openings of 2 to 5, 3 to 5.
Jeffrey Y. Volshteyn - JP Morgan Chase & Co, Research Division
That's helpful. Last question.
What are the utilization of your full service centers now?
Elizabeth J. Boland
So we're now -- we've been ticking up this year more in the range of 2 percentage points. So we're now in the range of 74% or so, 74% or 74.5% utilized.
Operator
Our next question comes from the line of Jeff Meuler with Robert W. Baird.
Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division
I guess -- I don't know if you're going to give us any more comments on the 2015 guidance. But just anything that you can help us out with.
It sounds like you're expecting similar EPS growth in 2015 despite slower revenue growth and less acquisition contributions. So just anything you could help us with the bridge, the similar EPS growth, slower revenue growth.
David H. Lissy
I think as Elizabeth talked about before, Jeff, I think we expect to return to some margin improvement that -- in a slightly more robust way than we enjoyed this past year. And I think that comes from a combination of factors, many of which we've already talked about before, but playing out into 2015.
And again, as I said earlier, we're not going to get into specifics in terms of that margin leverage. But we do expect to see it both at the gross margin line and the overhead line.
Jeffrey P. Meuler - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then on the back-up care margins.
In the past, you guys have kind of talked about those as being relatively full yet they continue to expand, and it looks like you're set up for a pretty nice year this year. Any change in the thinking on the longer-term margin targets for back-up care?
Elizabeth J. Boland
I think that we've framed the back-up business as a growth story and not a margin expansion, margin leverage story like the full service businesses because of the nature of the service that we're providing there. So I think that our -- we would continue to look out and work to sustain the margins but grow the contribution by higher revenue base.
I think what you're seeing in the business as we've continued to scale it is both operating efficiency -- as we do scale it and we have more of the infrastructure in place that needs to support the kind of service delivery that we have, we've continued to effectively and efficiently deploy those investments. But I think that our view is that it's not in the same kind of service delivery that full service is with a tuition level, salaries, everyday salaries of the centers.
So we would just be more cautious about planning for growth expansion on the margin line, and more just from more revenue.
Operator
Our next question comes from the line of Trace Urdan with Wells Fargo Securities.
Trace A. Urdan - Wells Fargo Securities, LLC, Research Division
So we've passed the Jeff portion of the call.
David H. Lissy
We certainly didn't plan it that way. That was 3 Jeffs in a row.
Trace A. Urdan - Wells Fargo Securities, LLC, Research Division
Moving into the hairsplitting section of the call. So I just wanted to -- on the back-up care theme, it looked like there were some sort of modest acceleration in growth in the quarter that looked pretty nice against the prior year comp, which was -- which also saw a surge.
And I'm wondering, David, if that kind of speaks to the -- what you mentioned in your prepared remarks about selling more products into customers? Or is there something else going on there?
David H. Lissy
I think back-up is, has been and continues to be a strong growth engine for us, both with -- in 3 ways: one, selling to new clients for the first time; secondly, cross-selling it into our legacy existing clients; and thirdly, lots of times, with back-up care, once we sell it into a company, we have a good shot at expanding it beyond what was initially sold. By that I mean, either by geography, sometimes it's piloted in geography initially and the company will roll it out, either nationally or globally, or sometimes will just increase the number of uses by employee that they're allowing.
Any number of ways, all yielding us more revenue per client. So those 3 things really explain why back-up has continued to grow and why we anticipate it to continue to be a strong growth engine in 2015.
Trace A. Urdan - Wells Fargo Securities, LLC, Research Division
Is there anything seasonal related to the sales of back-up care?
David H. Lissy
Just that on the very large -- on the largest back-up clients, the ones that -- we have back-up clients that range in several millions dollars a year in revenue, down to $50,000 a year in revenue. So in the very largest kinds of clients who would be our largest potential spenders, users of back-up care, they would tend mostly to make their decisions around now for next year.
And so -- or have already made it for next year because they tend to think like that from a benefits budgeting perspective. So that's the only seasonality.
Other than that, we can sell to middle to smaller sized clients pretty evenly throughout the year.
Operator
[Operator Instructions] Our next question comes from the line of Anj Singh with Crédit Suisse.
Anjaneya Singh - Crédit Suisse AG, Research Division
So I guess first one, just on the center closures. Could you just help us with understanding which regions are they in?
Are you finding any in urban locations that are underperforming? Are these more often lease/consortium or single sponsor?
And if the upside to your prior closure expectations is coming primarily from the acquisitions -- the big acquisitions last year or other centers?
David H. Lissy
Yes. So I think the closures, as I've said in the past, the normal closures that you can expect in the business typically either come from those that are coming to the end of their contractual life or lease life that we've had for a while that are underperforming and that we would close.
There are those obviously where we -- or out of our control where a client merges with another employer or they downsized a location to a point where the center's no longer viable. And then there are those that are associated with past acquisitions, as we've talked about before, that we circled up at the time of the deal and said, we needed to fix these or close these because we're not going to sustain -- we're not going to live with these as long-term underperformers.
And so I think this year, obviously, that last piece made up for more of -- drove the total closing number up. But again, just to give you some color on this, we look at this pretty closely.
You'll notice for example, like in this quarter, our capacity actually increased even though our net closings was a negative -- I mean, the net openings was negative. So that is one way to look at the -- that we're opening larger centers and closing smaller centers.
And the other way to look at it is, if you look at all -- if you were to take all the centers that we closed, yes, in 2014, against all the centers that we opened in 2014 and just take their first year or the 2015, if you will, revenue, expected revenue from that newer class of centers, it's double. So it's about -- it's double the revenue between the centers that closed and what they contributed in the last full year.
So there's lots of ways to sort of look at it. But in the end, we think the strategy to be prudent around closing centers and to be disciplined about it is accretive and is for good long-term interest of the business.
Anjaneya Singh - Crédit Suisse AG, Research Division
Okay, that's helpful. I appreciate the details there.
I guess another question. When we look at the overhead costs, they were slightly down, basically flat year-over-year on a dollar basis.
Is there anything else you can call out aside from the synergies that you've captured from the acquisitions that are driving that trend? Has the pace of investments in people and systems that you mentioned, has that remained the same?
Elizabeth J. Boland
It has actually remained the same. It's -- I think the overhead trends tend to be much less -- there aren't any particular seasonal effects that go into that.
And so I think there's -- it's just the timing of when certain initiatives may play out. But it's pretty stable all year round, as you can even see looking back in the history.
Anjaneya Singh - Crédit Suisse AG, Research Division
Okay, great. And one final one for me.
Regarding wage pressure, I realize that this comes up often. But asked another way, I'm wondering if there's any ebb and flow between sort of the arbitrage that you get on your average price increases versus average cost increases and if you can share the trends that you might be seeing now.
Elizabeth J. Boland
So I think the one element of this and one of the reasons that we've been successful in being disciplined around the difference between the tuition increases and the wage increases is that we typically are increasing price once a year and wages do come in throughout the year. Wage increases are on employees anniversary dates and/or their hire dates.
And so there is and can be either a leading or a lagging indicator on both of those. But it does give us visibility into the trends in wage rates so that when we're preparing for tuition increases, we have some sense going in for what the kinds of wage rates that we're paying in relation to the existing base.
So there isn't a large amount of ebb and flow, as you described it, between those 2 that we can't manage through the tuition rate increase process. And I think that it's been -- by keeping that targeted 1% differential, we're able to absorb both whatever slight timing, forward or lagging time may occur and/or absorb the other personnel costs that are rising at a pace that's faster than wages.
So we feel pretty good about that cost management side of things.
Operator
Our next question comes from the line of Brian Zimmerman with Goldman Sachs.
Alex Karpos - Goldman Sachs Group Inc., Research Division
This is Alex Karpos on for Brian. What's your view on the acquisition environment in the U.S.
versus abroad? Are there any particular markets that are more attractive right now than others?
David H. Lissy
I think that our view on -- my comments with respect to the flow and the visibility that we have is split pretty evenly between the U.K., the Netherlands and the U.S. Or said differently, about split evenly between the U.K.
and the Netherlands and the U.S., half and half. So Europe and the U.S.
I think in both places, there are -- there remain good opportunities. The one thing that I would point out is, I think the U.K.
and the Netherlands probably, well, the U.K. specifically, probably has more opportunity for deals that are in the range of what we did last year at that size than are left in the U.S.
The U.S. has a couple.
But not many left at that size. And so -- but on the smaller stuff, I think the flow looks pretty similar between countries.
Alex Karpos - Goldman Sachs Group Inc., Research Division
Okay. And just a quick follow-up.
Could you remind us on how the various markets compare from a growth and margin perspective?
Elizabeth J. Boland
How the -- you mean the U.S. and the U.K.?
Alex Karpos - Goldman Sachs Group Inc., Research Division
Right, right.
Elizabeth J. Boland
So the U.K. has had a slightly higher growth rate because of the significant acquisition that we did last year.
But I think longer term, if we look more agnostically to the outside acquisitions, the top-line growth opportunity is pretty consistent between the 2 countries in terms of unit growth, where we would be adding between 2% and 5% of revenue coming from new unit growth of either organic or acquired centers and rate increases on top of that of 3% to 4%. On a margin basis, also very similar margins, the U.K.
business has in the range of the same 15% to 25%, depending on the contract model type, as the U.S. And I think the only difference is the size of the centers in the U.K.
And the Netherlands tend to be smaller. They're about 60% of the overall size of the U.S.
full service business. And then once you've look at the countries with all of the businesses rolled in, of course, the U.S.
has a significantly higher contribution on the margin side from the back-up business and the ed advisory business. So I think when you're looking at gross margin in the range of 23%, it'd be -- broad strokes, it'd be 5 percentage points difference on average maybe between the U.S.
and the U.K.
Operator
There are no further questions at this time. I would now like to turn it back to Mr.
David Lissy for closing comments.
David H. Lissy
Okay, thank you, all, for your questions and for being with us on the call. Hope you had a chance to vote.
And we look forward to seeing you on the road. Have a good night.
Elizabeth J. Boland
Thanks.
Operator
Thank you. Ladies and gentlemen, this concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.