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BFAM > SEC Filings for BFAM > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for BRIGHT HORIZONS FAMILY SOLUTIONS INC.

Form 10-Q for BRIGHT HORIZONS FAMILY SOLUTIONS INC.


9-Aug-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 monetary 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.

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.


Table of Contents

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. ("we" or the "Company") for the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 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 June 30, 2013 and 2012 (in thousands, except
percentages):




                                                                Three Months Ended June 30,
                                                   2013              %             2012              %
Revenue                                          $ 310,813           100.0 %     $ 271,463           100.0 %
Cost of services (1)                               235,388            75.7 %       206,910            76.2 %

Gross profit                                        75,425            24.3 %        64,553            23.8 %
Selling general & administrative expenses (2)       32,426            10.4 %        41,859            15.4 %
Amortization                                         7,602             2.5 %         6,633             2.5 %

Income from operations                              35,397            11.4 %        16,061             5.9 %
Net interest expense and other                      (8,924 )          -2.9 %       (20,499 )          -7.6 %

Income (loss) before income tax                     26,473             8.5 %        (4,438 )          -1.7 %
Income tax (expense) benefit                        (1,966 )          -0.6 %         2,524             0.9 %

Net income (loss)                                $  24,507             7.9 %     $  (1,914 )          -0.8 %

Adjusted EBITDA (3)                              $  56,673            18.2 %     $  47,879            17.6 %

Adjusted income from operations (3)              $  36,309            11.7 %     $  31,578            11.6 %

Adjusted net income (3)                          $  23,104             7.4 %     $  11,598             4.3 %


Table of Contents

The following table sets forth statement of operations data as a percentage of revenue for the six months ended June 30, 2013 and 2012 (in thousands, except percentages):

                                                                 Six Months Ended June 30,
                                                   2013              %             2012              %
Revenue                                          $ 590,936           100.0 %     $ 529,585           100.0 %
Cost of services (1)                               449,721            76.1 %       407,012            76.9 %

Gross profit                                       141,215            23.9 %       122,573            23.1 %
Selling general & administrative expenses (2)       76,031            12.9 %        67,226            12.7 %
Amortization                                        14,350             2.4 %        13,182             2.5 %

Income from operations                              50,834             8.6 %        42,165             7.9 %
Loss on extinguishment of debt                     (63,682 )         -10.8 %            -              0.0 %
Net interest expense and other                     (22,192 )          -3.7 %       (40,370 )          -7.6 %

(Loss) income before income tax                    (35,040 )          -5.9 %         1,795             0.3 %
Income tax benefit (expense)                         8,766             1.5 %          (119 )            -

Net (loss) income                                $ (26,274 )          -4.4 %     $   1,676             0.3 %

Adjusted EBITDA (3)                              $ 105,188            17.8 %     $  89,499            16.9 %

Adjusted income from operations (3)              $  65,713            11.1 %     $  57,682            10.9 %

Adjusted net income (3)                          $  38,670             6.5 %     $  20,006             3.8 %

(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 June 30, 2013 Compared to the Three Months Ended June 30, 2012

Revenue. Revenue increased $39.4 million, or 14.5%, to $310.8 million for the three months ended June 30, 2013 from $271.5 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 June 30, 2013 increased by $34.3 million, or 14.6%, when compared to the same period in 2012. Our acquisitions of Kidsunlimited, an operator of 64 centers in the United Kingdom on April 10, 2013, and Casterbridge Care and Education, an operator of 27 centers in the United Kingdom on May 23, 2012, contributed approximately $27.6 million of revenue in the three months ended June 30, 2013.

Revenue generated by back-up dependent care services in the three months ended June 30, 2013 increased by $4.1 million, or 12.8%, when compared to the same period in 2012. Additionally, revenue generated by other educational advisory services in the three months ended June 30, 2013 increased by $0.9 million, or 22.4%, when compared to the same period in 2012.

At June 30, 2013, we operated 830 child care and early education centers compared to 773 centers at June 30, 2012.

Cost of Services. Cost of services increased $28.5 million, or 13.8%, to $235.4 million for the three months ended June 30, 2013 when compared to the same period in the prior year. Cost of services in the full service center-based care services segment increased $26.6 million, or 14.3%, to $212.7 million in 2013. Personnel costs typically represent approximately 75% of total cost of services for this segment, and personnel costs increased 11.0% as a result of a 12.0% increase in overall enrollment and routine wage increases. In addition, program supplies, materials, food and facilities costs increased 24.0% in connection with the enrollment growth and the incremental occupancy costs associated with centers that have been added since June 30, 2012. Cost of services in the back-up dependent care segment increased $1.5 million, or 7.9%, to $19.9 million in the three months ended June 30, 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 $0.4 million, or 17.1%, to $2.8 million in the three months ended June 30, 2013 due to personnel and technology costs related to the incremental sales of these services.


Table of Contents

Gross Profit. Gross profit increased $10.9 million, or 16.8%, to $75.4 million for the three months ended June 30, 2013 when compared to the same period in the prior year, and as a percentage of revenue, increased to 24.3% in the three months ended June 30, 2013 from 23.8% in the three months ended June 30, 2012. The increase is primarily due to contributions from new centers and from 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 decreased $9.4 million, or 22.5%, to $32.4 million for the three months ended June 30, 2013 compared to $41.9 million for the same period in the prior year, and as a percentage of revenue decreased to 10.4% from 15.4% in the same period in the prior year. Results for the second quarter of 2012 included $15.1 million of incremental compensation costs associated with the modification of the previously existing awards and the issuance of immediately vested options, and $0.4 million of expenses associated with the Offering. Exclusive of these expenses totaling $15.5 million in the second quarter of 2012, SGA increased $6.1 million during the second quarter of 2013 due primarily due to continued investments in technology and marketing, incremental overhead associated with the Kidsunlimited centers, an increase in compensation costs, including annual wage increases and stock-based compensation costs, as well as routine increases in SGA costs compared to the prior year.

Amortization. Amortization expense on intangible assets totaled $7.6 million for the three months ended June 30, 2013, compared to $6.6 million for the three months ended June 30, 2012, due to the acquisitions previously described.

Income from Operations. Income from operations increased by $19.4 million, or 120.4%, to $35.4 million for the three months ended June 30, 2013 when compared to the same period in 2012. Income from operations was 11.4% of revenue for the three months ended June 30, 2013, compared to 5.9% of revenue for the three months ended June 30, 2012. The increase was due to the following:

In the full service center-based care segment, income from operations increased $13.3 million for the three months ended June 30, 2013. Results for the second quarter of 2012 included $11.4 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options as well as costs related to the initial public offering. Results for the three months ended June 30, 2013 included $0.6 million of costs associated with the completion of a secondary offering of common shares and $0.3 million of acquisition related costs. Exclusive of these charges, income from operations increased $2.8 million primarily due to the price increases and enrollment gains over the prior year as well as contributions from the acquisitions of Kidsunlimited and Casterbridge and contributions from new centers that have been added since June 30, 2012, offset by increases in allocated SGA costs.

Income from operations for the back-up dependent care segment increased $4.5 million in the three months ended June 30, 2013. Results for the second quarter of 2012 included $2.8 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options. Exclusive of the $2.8 million charge in the second quarter of 2012, income from operations increased $1.7 million due to the expanding revenue base.

Income from operations in the other educational advisory services segment increased $1.5 million for the three months ended June 30, 2013 compared to the same period in 2012. Results for the second quarter of 2012 included $1.3 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options. Exclusive of the $1.3 million charge in the second quarter of 2012, income from operations increased $0.2 million due to the expanding growth of the business offset by investments in technology.

Interest Expense. Interest expense decreased to $8.9 million for the three months ended June 30, 2013 from $20.5 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. Our income tax expense and effective tax rate are as follows (in thousands, except percentages):

                                            Three months ended June 30,
                                             2013                  2012
         Income tax (expense) benefit   $       (1,966 )       $      2,524

         Effective income tax rate                 7.4 %               56.9 %

We recorded income tax expense of $2.0 million during the three months ended June 30, 2013 compared to an income tax benefit of $2.5 million during the comparable period in the prior year. The change in the effective rate 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 $63.7 million, as well as the recognition of a previously unrecognized tax benefit of approximately $4.1 million upon resolution of a UK tax enquiry in the second quarter of 2013.


Table of Contents

Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $8.8 million, or 18.4%, and $4.7 million, or 15.0%, respectively, for the three months ended June 30, 2013 over the comparable period in 2012 primarily as a result of the increase in gross profit due additional contributions from full-service centers, including the impact of acquired centers, as well as the growth in the back-up business, offset by increases in SGA spending.

Adjusted Net Income. Adjusted net income increased $11.5 million, or 99.2%, for the three months ended June 30, 2013 when compared to the comparable period in 2012 primarily due to the incremental gross profit described above, which was offset by increases in SGA spending to support the growth. Adjusted net income also increased due to the reduction in interest expense associated with the refinancing of our debt in January 2013.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Revenue. Revenue increased $61.4 million, or 11.6%, to $590.9 million for the six months ended June 30, 2013 from $529.6 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 six months ended June 30, 2013 increased by $52.5 million, or 11.4%, when compared to the same period in 2012. Our acquisitions of Kidsunlimited, an operator of 64 centers in the United Kingdom on April 10, 201,3 and Casterbridge Care and Education, an operator of 27 centers in the United Kingdom on May 23, 2012, contributed approximately $38.2 million of revenue in the six months ended June 30, 2013. Revenue generated by back-up dependent care services in the six months ended June 30, 2013 increased by $7.1 million, or 11.5%, when compared to the same period in 2012. Additionally, revenue generated by other educational advisory services in the six months ended June 30, 2013 increased by $1.7 million, or 20.6%, when compared to the same period in 2012.

Cost of Services. Cost of services increased $42.7 million, or 10.5%, to $449.7 million for the six months ended June 30, 2013 when compared to the same period in the prior year. Cost of services in the full service center-based care services segment increased $38.4 million, or 10.5%, to $404.9 million in 2013. Personnel costs typically represent approximately 75% of total cost of services for this segment, and personnel costs increased 8.4% as a result of a 9.0% increase in overall enrollment and routine wage increases. In addition, program supplies, materials, food and facilities costs increased 16.6% in connection with the enrollment growth and the incremental occupancy costs associated with centers that have been added since June 30, 2012. Cost of services in the back-up dependent care segment increased $3.3 million, or 9.2%, to $39.1 million in the first six 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 $1.0 million, or 21.6%, to $5.7 million in the first six months of 2013 due to personnel and technology costs related to the incremental sales of these services.

Gross Profit. Gross profit increased $18.6 million, or 15.2%, to $141.2 million for the six months ended June 30, 2013 when compared to the same period in the prior year, and as a percentage of revenue, increased to 23.9% in the six months ended June 30, 2013 from 23.1% in the six months ended June 30, 2012. The increase is primarily due to contributions from new centers and from 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 $8.8 million, or 13.1%, to $76.0 million for the six months ended June 30, 2013 compared to $67.2 million for the same period in the prior year, and as a percentage of revenue increased to 12.9% from 12.7% in the same period in the prior year. Results for the six months ended June 30, 2012 included $15.1 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options and $0.4 million of expenses associated with the offering. Results for the six months ended June 30, 2013 included a $7.5 million fee for the termination of the management agreement with Bain Capital Partners LLC ("Sponsor termination fee"), a $5.0 million stock-based compensation charge for certain stock options that vested upon completion of the Offering ("performance-based stock compensation charge"), $0.6 million of costs associated with the completion of a secondary offering of common shares and $1.8 million of acquisition related costs. Excluding the incremental impact of these items, SGA increased $9.4 million or 18.2% over the comparable period due primarily due to continued investments in technology and marketing, incremental overhead related to the operations of Kidsunlimited and Casterbridge, an increase in compensation costs, including annual wage increases and stock-based compensation costs, as well as routine increases in SGA costs compared to the prior year.

Amortization. Amortization expense on intangible assets totaled $14.4 million for the six months ended June 30, 2013, compared to $13.2 million for the six months ended June 30, 2012 due to acquisitions previously described.


Table of Contents

Income from Operations. Income from operations increased by $8.7 million, or 20.6%, to $50.8 million for the six months ended June 30, 2013 when compared to the same period in 2012. Income from operations was 8.6% of revenue for the six months ended June 30, 2013, compared to 7.9% of revenue for the six months ended June 30, 2012. The increase was due to the following:

In the full service center-based care segment, income from operations increased $5.0 million for the six months ended June 30, 2013. Results for the six months ended June 30, 2012 included $11.4 million of incremental compensation costs associated with the modification of the previously existing awards and the issuance of immediately vested options as well as costs related to the initial public offering. Results for the six months ended June 30, 2013 included an aggregate proportionate charge of $12.2 million for the Sponsor termination fee, the performance-based stock compensation charge, costs associated with the completion of a secondary offering of our common shares and acquisition related costs. Excluding the effect of these charges, income from operations increased $5.8 million in 2013 primarily due to the price increases and enrollment gains over the prior year as well as contributions from new centers that have been added since June 30, 2012, including acquired centers, offset by increases in allocated SGA costs.

Income from operations for the back-up dependent care segment increased $3.2 million in the six months ended June 30, 2013. Results for the six months ended June 30, 2012 included $2.8 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options. Results for the six months ended June 30, 2013 included an aggregate proportionate charge of . . .

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