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BFAM > SEC Filings for BFAM > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for BRIGHT HORIZONS FAMILY SOLUTIONS INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for BRIGHT HORIZONS FAMILY SOLUTIONS INC.


10-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This periodic report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms "believes," "expects," "may," "will," "should," "seeks," "projects," "approximately," "intends," "plans," "estimates" or "anticipates," or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we and our partners operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those listed below and included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012:

Changes in the demand for child care and other dependent care services;

Our ability to hire and retain qualified teachers;

Our substantial indebtedness could affect our financial condition;

That the terms of our indebtedness could restrict our current and future operations;

The possibility that acquisitions may disrupt our operations and expose us to additional risk;

Our reliance on the expertise of operating staff, especially in international markets;

The possibility that adverse publicity would have a negative impact on the demand for our services and the value of our brand;

The possibility that our business activities subject us to litigation risks that could result in significant money or reputational damages;

Our ability to pass on our increased costs;

Changes in our relationships with employer sponsors;

Our ability to obtain and maintain adequate insurance coverage at a reasonable cost;

Changes in laws or regulations that govern our business;

Our ability to withstand seasonal fluctuations in the demand for our services;

Our ability to retain and attract key management and key employees;

Significant competition within our industry;

Our ability to implement our growth strategies successfully;

Our susceptibility to the economic impact of governmental or universal child care programs in the countries in which we operate;

Breaches in data security; and

The impact of a regional or global health pandemic or other catastrophic event.

These factors should not be construed as exhaustive.


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Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this quarterly report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments.

Introduction and Overview

The following is a discussion of the significant factors affecting the consolidated operating results, financial condition and liquidity and cash flows of Bright Horizons Family Solutions Inc. (the "Company") for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. This discussion should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements of the Company and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Our business is subject to seasonal and quarterly fluctuations. Demand for child care and early education and elementary school services has historically decreased during the summer months when school is not in session, at which time families are often on vacation or have alternative child care arrangements. In addition, our enrollment declines as older children transition to elementary schools. Demand for our services generally increases in September and October coinciding with the beginning of the new school year and remains relatively stable throughout the rest of the school year. In addition, use of our back-up dependent care services tends to be higher when schools are not in session and during holiday periods, which can increase the operating costs of the program and impact the results of operations. Results of operations may also fluctuate from quarter to quarter as a result of, among other things, the performance of existing centers, including enrollment and staffing fluctuations, the number and timing of new center openings, acquisitions and management transitions, the length of time required for new centers to achieve profitability, center closings, refurbishment or relocation, the contract model mix (P&L versus cost-plus) of new and existing centers, the timing and level of sponsorship payments, competitive factors and general economic conditions.

                             Results of Operations

The following table sets forth statement of operations data as a percentage of
revenue for the three months ended March 31, 2013 and 2012 (in thousands, except
percentages):



                                                             Three Months Ended March 31,
                                                   2013             %            2012             %
Revenue                                          $ 280,123         100.0 %     $ 258,122         100.0 %
Cost of services (1)                               214,333          76.5 %       200,102          77.5 %

Gross profit                                        65,790          23.5 %        58,020          22.5 %
Selling general & administrative expenses (2)       43,605          15.6 %        25,367           9.8 %
Amortization                                         6,748           2.4 %         6,549           2.6 %

Income from operations                              15,437           5.5 %        26,104          10.1 %
Loss on extinguishment of debt                     (63,682 )       -22.7 %            -            0.0 %
Net interest expense and other                     (13,268 )        -4.7 %       (19,871 )        -7.7 %

(Loss) income before income tax                    (61,513 )       -21.9 %         6,233           2.4 %
Income tax (benefit) provision                     (10,732 )        -3.8 %         2,643           1.0 %

Net (loss) income                                $ (50,781 )       -18.1 %     $   3,590           1.4 %
Adjusted EBITDA (3)                              $  48,515          17.3 %     $  41,620          16.1 %

Adjusted income from operations (3)              $  29,404          10.5 %     $  26,104          10.1 %

Adjusted net income (3)                          $  15,567           5.6 %     $   8,412           3.3 %


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(1) Cost of services consists of direct expenses associated with the operation of child care centers, and direct expenses to provide back-up dependent care services, including fees to back-up care providers, and educational advisory services. Direct expenses consist primarily of salaries, taxes and benefits for personnel, food costs, program supplies and materials, parent marketing and facilities costs, which include occupancy costs and depreciation.

(2) Selling, general and administrative ("SGA") expenses consist primarily of salaries, payroll taxes and benefits (including stock compensation costs) for corporate, regional and business development personnel. Other overhead costs include information technology, occupancy costs for corporate and regional personnel, professional services fees, including accounting and legal services, and other general corporate expenses.

(3) Adjusted EBITDA, adjusted income from operations and adjusted net income are non-GAAP measures, which are reconciled to net income (loss) below.

Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012

Revenue. Revenue increased $22.0 million, or 8.5%, to $280.1 million for the three months ended March 31, 2013 from $258.1 million for the same period in the prior year. Revenue growth is primarily attributable to contributions from new and ramping child care and early education centers, expanded sales of our back-up dependent care services and typical annual tuition increases of 3% to 4%. Revenue generated by full service center-based care services in the three months ended March 31, 2013 increased by $18.2 million, or 8.1%, when compared to the same period in 2012. Revenue generated by back-up dependent care services in the three months ended March 31, 2013 increased by $3.0 million, or 10.1%, when compared to the same period in 2012. Additionally, revenue generated by other educational advisory services in the three months ended March 31, 2013 increased by $0.8 million, or 18.7%, when compared to the same period in 2012.

Our acquisition of the 27 Casterbridge centers in the United Kingdom on May 23, 2012 contributed approximately $10.6 million of revenue in the three months ended March 31, 2013. At March 31, 2013, we operated 773 child care and early education centers compared to 743 centers at March 31, 2012.

Cost of Services. Cost of services increased $14.2 million, or 7.1%, to $214.3 million for the three months ended March 31, 2013 when compared to the same period in the prior year. Cost of services in the full service center-based care services segment increased $11.8 million, or 6.5%, to $192.2 million in 2013. Personnel costs typically represent approximately 75% of total cost of services for this segment, and personnel costs increased 5.7% as a result of a 6.0% increase in overall enrollment and routine wage increases. In addition, program supplies, materials, food and facilities costs increased 9.0% in connection with the enrollment growth and the incremental occupancy costs associated with centers that have been added since March 31, 2012. Cost of services in the back-up dependent care segment increased $1.8 million, or 10.5%, to $19.3 million in the first three months of 2013, primarily for personnel costs and for increased care provider fees associated with the higher levels of back-up services provided. Cost of services in the other educational advisory services segment increased by $0.6 million, or 26.2%, to $2.9 million in the first three months of 2013 due to personnel and technology costs related to the incremental sales of these services.

Gross Profit. Gross profit increased $7.8 million, or 13.4%, to $65.8 million for the three months ended March 31, 2013 when compared to the same period in the prior year, and as a percentage of revenue, increased to 23.5% in the three months ended March 31, 2013 from 22.5% in the three months ended March 31, 2012. The increase is primarily due to the new and ramping P&L centers, which achieve proportionately lower levels of operating costs in relation to revenue as they ramp up enrollment to steady state levels, increased enrollment in our mature P&L centers and expanded back-up services revenue with proportionately lower direct cost of services.

Selling, General and Administrative Expenses. SGA increased $18.2 million, or 71.9%, to $43.6 million for the three months ended March 31, 2013 compared to $25.4 million for the same period in the prior year, and as a percentage of revenue increased to 15.6% from 9.8% in the same period in the prior year. The increase in SGA was primarily due to a $7.5 million fee for the termination of the management agreement with Bain Capital Partners LLC ("Sponsor termination fee"), and a $5.0 million stock-based compensation charge for certain stock options that vested upon completion of the Offering ("performance-based stock compensation charge"). During the quarter ended March 31, 2013, we also incurred approximately $1.5 million of costs related to the acquisition of kidsunlimited, which was completed on April 10, 2013. Excluding the incremental impact of these costs in the first quarter of 2013, SGA increased by $4.2 million, or 16.5%, for the three months ended March 31, 2013 compared to the same period in 2012. This increase in


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SGA is related to investments in technology and marketing, incremental overhead associated with additional full service and backup child care services, higher stock compensation expense and to routine increases in costs compared to the prior year, including annual wage increases.

Amortization. Amortization expense on intangible assets totaled $6.7 million for the three months ended March 31, 2013, compared to $6.5 million for the three months ended March 31, 2012.

Income from Operations. Income from operations decreased by $10.7 million, or 40.9%, to $15.4 million for the three months ended March 31, 2013 when compared to the same period in 2012. Income from operations was 5.5% of revenue for the three months ended March 31, 2013, compared to 10.1% of revenue for the three months ended March 31, 2012. The decrease was due to the following:

In the full service center-based care segment, income from operations decreased $8.3 million for the three months ended March 31, 2013 due primarily to its proportionate share of the sponsor termination fee and performance-based stock compensation charge discussed above, and costs of $1.5 million related to the acquisition of kidsunlimited. Excluding the $11.3 million effect of these charges, the $3.0 million increase in adjusted income from operations in 2013 to $20.2 million reflects price increases and enrollment gains over the prior year as well as contributions from new centers that have been added since March 31, 2012.

Income from operations for the back-up dependent care segment decreased $1.4 million in the three months ended March 31, 2013 due to its proportionate share of the Sponsor termination fee and performance-based stock compensation charge discussed above. Excluding the $1.9 million effect of these charges , the back-up dependent care segment added $0.5 million in income from operations in the three months ended March 31, 2013 due to the expanding revenue base.

Income from operations in the other educational advisory services segment decreased $1.0 million for the three months ended March 31, 2013 compared to the same period in 2012, but decreased $0.2 million when excluding this segment's proportionate share of the Sponsor termination fee and performance-based stock compensation charge discussed above of $0.8 million. This reflects the investment in technology to support the growth of the business.

Loss on Extinguishment of Debt. In connection with the refinancing of all of our existing debt on January 30, 2013, we recorded a loss on extinguishment of debt of $63.7 million, which included the redemption premiums and the write-off of existing deferred financing costs.

Interest Expense. Interest expense decreased to $13.3 million for the three months ended March 31, 2013 from $19.9 million for the same period in 2012 due to the debt refinancing completed on January 30, 2013, which reduced the borrowings outstanding as well as the rate at which interest is payable.

Income Tax Expense. We recorded an income tax benefit of $10.7 million during the three months ended March 31, 2013 compared to an income tax expense of $2.6 million during the comparable period in the prior year. The effective rate decreased to 17.4% for the three months ended March 31, 2013 compared to 42.4% in the three months ended March 31, 2012. This decrease was due to the impact of similar permanent differences, primarily deductions allowed in foreign jurisdictions, on a projected lower base of pre-tax income in 2013 due largely to the loss on extinguishment of debt, the Sponsor termination fee and the performance-based stock compensation charge.

Adjusted EBITDA. Adjusted EBITDA increased $6.9 million, or 16.6%, for the three months ended March 31, 2013 over the comparable period in 2012 primarily as a result of the increase in gross profit offset by increases in SGA spending.

Adjusted Income from Operations. Adjusted income from operations increased $3.3 million, or $12.6%, for the three months ended March 31, 2013 over the comparable period in 2012 primarily as a result of the increase in gross profit offset by increases in SGA spending.


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Adjusted Net Income. Adjusted net income increased $7.2 million, or 85.1%, for the three months ended March 31, 2013 when compared to the comparable period in 2012 primarily as a result of the increase in gross profit offset by increases in SGA spending.

A reconciliation of the non-GAAP measures of adjusted EBITDA, adjusted income from operations and adjusted net income are as follows (in thousands):

                                                  Three Months Ended March 31,
                                                   2013                  2012

   Net (loss) income                          $      (50,781 )       $       3,590
   Interest expense, net                              13,268                19,871
   Loss on extinguishment of debt (f)                 63,682                    -
   Income tax (benefit) expense                      (10,732 )               2,643
   Depreciation                                        9,698                 7,889
   Amortization (e)                                    6,748                 6,549

   EBITDA                                             31,883                40,542
   Additional Adjustments:
   Straight line rent expense (a)                        839                   228
   Stock compensation expense (b)                      6,620                   225
   Sponsor management fee (c)                          7,674                   625
   Expenses related to acquisitions (d)                1,499                    -

   Total adjustments                                  16,632                 1,078

   Adjusted EBITDA                            $       48,515         $      41,620


   Income from operations                     $       15,437         $      26,104
   Performance-based stock compensation (b)            4,968                    -
   Sponsor termination fee (c)                         7,500                    -
   Acquisition-related costs (d)                       1,499                    -

   Adjusted income from operations            $       29,404         $      26,104


   Net (loss) income                          $      (50,781 )       $       3,590
   Income tax (benefit) expense                      (10,732 )               2,643

   (Loss) income before tax                          (61,513 )               6,233
   Stock compensation expense (b)                      6,620                   225
   Sponsor management fee (c)                          7,674                   625
   Amortization (e)                                    6,748                 6,549
   Loss on extinguishment of debt (f)                 63,682                    -
   Acquisition-related costs (d)                       1,499                    -

   Adjusted income before tax                         24,710                13,632
   Income tax expense (g)                             (9,143 )              (5,220 )

   Adjusted net income                        $       15,567         $       8,412

(a) Represents rent in excess of cash paid for rent, recognized on a straight line basis over the lease life in accordance with Accounting Standards Codification ("ASC") Topic 840, Leases.

(b) Represents non-cash stock-based compensation expense, including performance-based stock compensation charge.

(c) Represents annual fees paid to our Sponsor under a management agreement, including the Sponsor termination fee.

(d) Represents costs associated with the acquisition of businesses.

(e) Represents amortization of intangible assets, including amounts associated with intangible assets recorded in connection with our going private transaction in May 2008.


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(f) Represents redemption premiums and write off of unamortized debt issue costs and original issue discount associated with indebtedness that was repaid in connection with a refinancing.

(g) Represents income tax expense calculated on adjusted income before tax at the effective rate of 37% in 2013 and 38% in 2012.

Adjusted EBITDA, adjusted income from operations and adjusted net income are not presentations made in accordance with GAAP, and the use of the terms adjusted EBITDA, adjusted income from operations, and adjusted net income may differ from similar measures reported by other companies. We believe that adjusted EBITDA, adjusted income from operations and adjusted net income provide investors with useful information with respect to our historical operations. We present adjusted EBITDA, adjusted income from operations and adjusted net income as supplemental performance measures because we believe they facilitate a comparative assessment of our operating performance relative to our performance based on our results under GAAP, while isolating the effects of some items that vary from period to period. Specifically, adjusted EBITDA allows for an assessment of our operating performance and of our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, the excess of rent expense over cash rent expense and stock compensation expense, and the effect of fees associated with our Sponsor management agreement, which was terminated in connection with the completion of our Offering on January 30, 2013, as well as the expenses related to the acquisition of businesses. In addition, adjusted income from operations and adjusted net income allow us to assess our performance without the impact of the specifically identified items that we believe do not directly reflect our core operations. These measures also function as benchmarks to evaluate our operating performance. Adjusted EBITDA, adjusted income from operations and adjusted net income are not measurements of our financial performance under GAAP and should not be considered in isolation or as an alternative to income before taxes, net income, net cash provided by operating, investing or financing activities or any other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. The Company understands that although adjusted EBITDA, adjusted income from operations and adjusted net income are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

adjusted EBITDA, adjusted income from operations, and adjusted net income do not fully reflect the Company's cash expenditures, future requirements for capital expenditures or contractual commitments;

adjusted EBITDA, adjusted income from operations, and adjusted net income do not reflect changes in, or cash requirements for, the Company's working capital needs;

adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and,

adjusted EBITDA, adjusted income from operations and adjusted net income do not reflect any cash requirements for such replacements.

Because of these limitations, adjusted EBITDA, adjusted income from operations, and adjusted net income should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.


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Non-GAAP earnings (loss) per share

On January 30, 2013, the Company completed an initial public offering ("the Offering") and, after the exercise of the overallotment option on February 21, 2013, issued a total of 11.6 million shares of common stock. On January 11, 2013, the Company effected a 1-for-1.9704 reverse split of its Class A common stock. In addition, the Company converted each share of its Class L common stock into 35.1955 shares of Class A common stock, and, immediately following the conversion of its Class L common stock, reclassified those shares as well as all outstanding shares of Class A common stock, into common stock. As a result of the reclassification of Class A common stock to common stock, all references to "Class A common stock" have been changed to "common stock" for all periods presented. The number of common shares used in the calculations of diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share for the three months ended March 31, 2013 and March 31, 2012 give effect to the conversion of all weighted average outstanding shares of Class L common stock at the conversion factor of 35.1955 common shares for each Class L share, as if the conversion was completed at the beginning of the respective period.

The calculations of diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share also include the dilutive effect of common stock options, using the treasury stock method. Shares sold in the offering are included in the diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share calculations beginning on the date that such shares were actually issued. Diluted earnings per pro forma common share is calculated using net income in accordance with GAAP. Diluted adjusted earnings per pro forma common share is calculated using adjusted net . . .

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