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BFAM > SEC Filings for BFAM > Form 10-Q on 7-Nov-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.


7-Nov-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 nine months ended September 30, 2013 compared to the three and nine months ended September 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.


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                             Results of Operations

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



                                                              Three Months Ended September 30,
                                                      2013             %            2012             %
Revenue                                             $ 308,663         100.0 %     $ 267,927         100.0 %
Cost of services (1)                                  240,158          77.8 %       207,835          77.6 %

Gross profit                                           68,505          22.2 %        60,092          22.4 %
Selling, general and administrative expenses (2)       33,017          10.7 %        27,621          10.3 %
Amortization                                            7,699           2.5 %         7,116           2.6 %

Income from operations                                 27,789           9.0 %        25,355           9.5 %
Net interest expense and other                         (9,195 )        -3.0 %       (21,332 )        -8.0 %

Income before income tax                               18,594           6.0 %         4,023           1.5 %
Income tax expense                                     (3,652 )        -1.2 %        (1,417 )        -0.5 %

Net income                                          $  14,942           4.8 %     $   2,606           1.0 %

Adjusted EBITDA (3)                                 $  49,975          16.2 %     $  44,301          16.5 %

Adjusted income from operations (3)                 $  29,536           9.6 %     $  26,355           9.8 %

Adjusted net income (3)                             $  18,436           6.0 %     $   8,434           3.1 %

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

                                                               Nine Months Ended September 30,
                                                      2013             %            2012             %
Revenue                                             $ 899,599         100.0 %     $ 797,512         100.0 %
Cost of services (1)                                  689,879          76.7 %       614,847          77.1 %

Gross profit                                          209,720          23.3 %       182,665          22.9 %
Selling, general and administrative expenses (2)      109,048          12.1 %        94,847          11.9 %
Amortization                                           22,049           2.5 %        20,298           2.5 %

Income from operations                                 78,623           8.7 %        67,520           8.5 %
Loss on extinguishment of debt                        (63,682 )        -7.1 %            -            0.0 %
Net interest expense and other                        (31,387 )        -3.5 %       (61,702 )        -7.8 %

(Loss) income before income tax                       (16,446 )        -1.9 %         5,818           0.7 %
Income tax benefit (expense)                            5,114           0.6 %        (1,536 )        -0.2 %

Net (loss) income                                   $ (11,332 )        -1.3 %     $   4,282           0.5 %

Adjusted EBITDA (3)                                 $ 155,163          17.2 %     $ 133,800          16.8 %

Adjusted income from operations (3)                 $  95,249          10.6 %     $  84,037          10.5 %

Adjusted net income (3)                             $  57,106           6.3 %     $  28,444           3.6 %

(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.


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Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenue. Revenue increased $40.7 million, or 15.2%, to $308.7 million for the three months ended September 30, 2013 from $267.9 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 September 30, 2013 increased by $33.2 million, or 14.4%, when compared to the same period in 2012. Our acquisitions of Kidsunlimited, an operator of 64 centers in the United Kingdom on April 10, 2013, and Children's Choice Learning Centers, Inc. ("Children's Choice"), an operator of 49 centers in the United States on July 22, 2013, contributed approximately $26.0 million of revenue in the three months ended September 30, 2013.

Revenue generated by back-up dependent care services in the three months ended September 30, 2013 increased by $5.6 million, or 17.1%, when compared to the same period in 2012. Additionally, revenue generated by other educational advisory services in the three months ended September 30, 2013 increased by $1.9 million, or 39.9%, when compared to the same period in 2012.

At September 30, 2013, we operated 880 child care and early education centers compared to 776 centers at September 30, 2012.

Cost of Services. Cost of services increased $32.3 million, or 15.5%, to $240.2 million for the three months ended September 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 $28.3 million, or 15.3%, to $213.3 million in 2013. Personnel costs typically represent approximately 75% of total cost of services for this segment, and personnel costs increased 12.8% as a result of a 16.0% increase in overall enrollment and routine wage increases. In addition, program supplies, materials, food and facilities costs increased 22.2% in connection with the enrollment growth at new and existing centers, and the incremental occupancy costs associated with centers that have been added since September 30, 2012. Cost of services in the back-up dependent care segment increased $2.7 million, or 13.5%, to $23.1 million in the three months ended September 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 $1.3 million, or 53.5%, to $3.8 million in the three months ended September 30, 2013 due to personnel and technology costs related to the incremental sales of these services.

Gross Profit. Gross profit increased $8.4 million, or 14.0%, to $68.5 million for the three months ended September 30, 2013 when compared to the same period in the prior year, and as a percentage of revenue, was 22.2% in the three months ended September 30, 2013 compared to 22.4% in the three months ended September 30, 2012. The increase in gross profit is primarily due to contributions from new and acquired centers as well as increased enrollment in our mature and ramping P&L centers and expanded back-up services revenue with proportionately lower direct cost of services. The increase was partially offset by training and integration costs of the acquisitions completed in 2013, as well as costs associated with additional lease model centers in 2013.

Selling, General and Administrative Expenses. SGA increased $5.4 million, or 19.5%, to $33.0 million for the three months ended September 30, 2013 compared to $27.6 million for the same period in the prior year, and as a percentage of revenue increased to 10.7% from 10.3% in the same period in the prior year. Results for the third quarter of 2013 included $1.7 million of acquisition related costs while results for the third quarter of 2012 included $1.0 million of expenses associated with the initial public offering ("the Offering"). Exclusive of these expenses, SGA increased $4.7 million during the third quarter of 2013 primarily due to continued investments in technology and marketing, incremental overhead associated with the businesses acquired in 2013, 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 $7.7 million for the three months ended September 30, 2013, compared to $7.1 million for the three months ended September 30, 2012, due to the acquisitions previously described.

Income from Operations. Income from operations increased by $2.4 million, or 9.6%, to $27.8 million for the three months ended September 30, 2013 when compared to the same period in 2012. Income from operations was 9.0% of revenue for the three months ended September 30, 2013, compared to 9.5% of revenue for the three months ended September 30, 2012. The increase in income from operations was due to the following:

In the full service center-based care segment, income from operations increased $0.2 million for the three months ended September 30, 2013. Results for the three months ended September 30, 2013 included $1.7 million of acquisition related costs. Results for the third quarter of 2012 included $0.7 million related to the Offering. Exclusive of these charges, income from operations increased $1.2 million primarily due to the tuition increases and enrollment gains over the prior year as well as contributions from new and acquired centers that have been added since September 30, 2012, partially offset by incremental overhead from acquired centers during the integration period.


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Income from operations for the back-up dependent care segment increased $1.8 million in the three months ended September 30, 2013 due to the expanding revenue base.

Income from operations in the other educational advisory services segment increased $0.4 million for the three months ended September 30, 2013 compared to the same period in 2012 due to the expanding growth of the business partially offset by investments in technology.

Net Interest Expense and Other. Net interest expense and other decreased to $9.2 million for the three months ended September 30, 2013 from $21.3 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 income tax expense of $3.7 million during the three months ended September 30, 2013 compared to an income tax expense of $1.4 million during the comparable period in the prior year. The difference between the effective income tax rate of 19.6% and the statutory rate in the third quarter of 2013 was due to the impact of permanent differences, primarily deductions allowed in foreign jurisdictions.

Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $5.7 million, or 12.8%, and $3.2 million, or 12.1%, respectively, for the three months ended September 30, 2013 over the comparable period in 2012 primarily as a result of the increase in gross profit due to additional contributions from full-service centers, including the impact of acquired centers, as well as the growth in the back-up dependent care business, offset by increases in SGA spending.

Adjusted Net Income. Adjusted net income increased $10.0 million, or 118.6%, for the three months ended September 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.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenue. Revenue increased $102.1 million, or 12.8%, to $899.6 million for the nine months ended September 30, 2013 from $797.5 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 nine months ended September 30, 2013 increased by $85.7 million, or 12.4%, when compared to the same period in 2012. Our acquisitions of Kidsunlimited on April 10, 2013, Children's Choice on July 22, 2013, and Casterbridge Care and Education on May 23, 2012, contributed approximately $57.2 million of incremental revenue in the nine months ended September 30, 2013.

Revenue generated by back-up dependent care services in the nine months ended September 30, 2013 increased by $12.8 million, or 13.5%, when compared to the same period in 2012. Additionally, revenue generated by other educational advisory services in the nine months ended September 30, 2013 increased by $3.6 million, or 27.8%, when compared to the same period in 2012.

Cost of Services. Cost of services increased $75.0 million, or 12.2%, to $689.9 million for the nine months ended September 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 $66.7 million, or 12.1%, to $618.2 million in 2013. Personnel costs typically represent approximately 75% of total cost of services for this segment, and personnel costs increased 9.9% as a result of an 11.7% increase in overall enrollment and routine wage increases associated with centers that have been added since September 30, 2012. In addition, program supplies, materials, food and facilities costs increased 18.3% in connection with the enrollment growth and the incremental occupancy costs associated with centers that have been added since September 30, 2012. Cost of services in the back-up dependent care segment increased $6.0 million, or 10.7%, to $62.2 million in the nine months ended September 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 $2.3 million, or 32.5%, to $9.5 million in the nine months ended September 30, 2013 due to personnel and technology costs related to the incremental sales of these services.

Gross Profit. Gross profit increased $27.1 million, or 14.8%, to $209.7 million for the nine months ended September 30, 2013 when compared to the same period in the prior year, and as a percentage of revenue, increased to 23.3% in the nine months ended September 30, 2013 from 22.9% in the nine months ended September 30, 2012. The increase is primarily due to contributions from acquired centers, increased enrollment in our mature and ramping P&L centers and expanded back-up services revenue with proportionately lower direct cost partially offset by training and integration costs of the 2013 acquisitions as well as costs associated with additional lease model centers in 2013.

Selling, General and Administrative Expenses.SGA increased $14.2 million, or 15.0%, to $109.0 million for the nine months ended September 30, 2013 compared to $94.8 million for the same period in the prior year, and as a percentage of revenue increased to 12.1% from 11.9% in the same period in the prior year. Results for the nine months ended September 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


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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 $3.5 million of acquisition related costs. Results for the nine months ended September 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 $1.4 million of expenses associated with the Offering. In addition to these items, SGA increased over the comparable period due primarily to continued investments in technology and marketing, incremental overhead related to the operations of the acquired businesses, 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 $22.0 million for the nine months ended September 30, 2013, compared to $20.3 million for the nine months ended September 30, 2012 due to acquisitions previously described.

Income from Operations. Income from operations increased by $11.1 million, or 16.4%, to $78.6 million for the nine months ended September 30, 2013 when compared to the same period in 2012. Income from operations was 8.7% of revenue for the nine months ended September 30, 2013, compared to 8.5% of revenue for the nine months ended September 30, 2012. The increase was due to the following:

In the full service center-based care segment, income from operations increased $5.2 million for the nine months ended September 30, 2013. Results for the nine months ended September 30, 2013 included an aggregate proportionate charge of $13.9 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. Results for the nine months ended September 30, 2012 included $12.2 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 Offering. Excluding the effect of these charges, income from operations increased $7.0 million in 2013 primarily due to the tuition increases and enrollment gains over the prior year as well as contributions from new and acquired centers that have been added since September 30, 2012, partially offset by incremental overhead from acquired centers during the integration period.

Income from operations for the back-up dependent care segment increased $5.0 million in the nine months ended September 30, 2013. Results for the nine months ended September 30, 2013 included an aggregate proportionate charge of $1.9 million for the Sponsor termination fee and the performance-based stock compensation charge. Results for the nine months ended September 30, 2012 included $3.0 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options. Excluding the effect of these charges, income from operations increased $3.9 million in 2013 due to the expanding revenue base.

Income from operations in the other educational advisory services segment increased $0.9 million for the nine months ended September 30, 2013 compared to the same period in 2012. Results for the nine months ended September 30, 2013 included an aggregate proportionate charge of $0.8 million for the Sponsor termination fee and the performance-based stock compensation charge. Results for the nine months ended September 30, 2012 included $1.3 million of incremental compensation associated with the modification of the previously existing awards and the issuance of immediately vested options. Excluding the effect of these charges, income from operations increased $0.4 million in 2013.

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.

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