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BFAM > SEC Filings for BFAM > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BRIGHT HORIZONS FAMILY SOLUTIONS INC.

Form 10-Q for BRIGHT HORIZONS FAMILY SOLUTIONS INC.


9-May-2014

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, 2013:

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.


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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. ("we" or the "Company") for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. 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, 2013.

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 March 31, 2014 and 2013 (in thousands, except
                                 percentages):



                                                                Three Months Ended March 31,
                                                      2014             %            2013             %
Revenue                                             $ 332,155         100.0 %     $ 280,123         100.0 %
Cost of services (1)                                  255,006          76.8 %       214,333          76.5 %

Gross profit                                           77,149          23.2 %        65,790          23.5 %
Selling, general and administrative expenses (2)       35,404          10.7 %        43,605          15.6 %
Amortization                                            7,734           2.3 %         6,748           2.4 %

Income from operations                                 34,011          10.2 %        15,437           5.5 %
Loss on extinguishment of debt                             -             -  %       (63,682 )       -22.7 %
Net interest expense and other                         (8,727 )        -2.6 %       (13,268 )        -4.7 %

Income (loss) before income tax                        25,284           7.6 %       (61,513 )       -22.0 %
Income tax (expense) benefit                           (9,236 )        -2.8 %        10,732           3.8 %

Net income (loss)                                   $  16,048           4.8 %     $ (50,781 )       -18.1 %

Adjusted EBITDA (3)                                 $  57,341          17.3 %     $  48,515          17.3 %

Adjusted income from operations (3)                 $  34,561          10.4 %     $  29,404          10.5 %

Adjusted net income (3)                             $  22,651           6.8 %     $  15,567           5.6 %

(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.

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Revenue. Revenue increased $52.0 million, or 18.6%, to $332.2 million for the three months ended March 31, 2014 from $280.1 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, 2014 increased by $44.8 million, or 18.5%, when compared to the same period in 2013. Revenue generated by back-up dependent care services in the three months ended March 31, 2014 increased by $4.3 million, or 13.0%, when compared to the same period in 2013. Additionally, revenue generated by other educational advisory services in the three months ended March 31, 2014 increased by $3.0 million, or 62.9%, when compared to the same period in 2013.

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 $30.4 million of revenue in the three months ended March 31, 2014. At March 31, 2014, we operated 881 child care and early education centers compared to 773 centers at March 31, 2013.

Cost of Services. Cost of services increased $40.7 million, or 19.0%, to $255.0 million for the three months ended March 31, 2014 when compared to the same period in the prior year. Cost of services in the full service center-based care services segment increased $37.4 million, or 19.5%, to $229.6 million in 2014. Personnel costs typically represent approximately 70-75% of total cost of services for this segment, and personnel costs increased 15.2% as a result of a 20.0% increase in overall enrollment and routine wage increases. In addition, program supplies, materials, food and facilities costs increased 30.5% in connection with the enrollment growth at new and existing centers, and the incremental occupancy costs associated with centers that have been added since March 31, 2013. Cost of services in the back-up dependent care segment increased $1.4 million, or 7.0%, to $20.6


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million in the three months ended March 31, 2014, 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 $1.9 million, or 64.8%, to $4.8 million in the three months ended March 31, 2014 due to personnel and technology costs related to the incremental sales of these services.

Gross Profit. Gross profit increased $11.4 million, or 17.3%, to $77.1 million for the three months ended March 31, 2014 when compared to the same period in the prior year, and as a percentage of revenue, decreased to 23.2% in the three months ended March 31, 2014 compared to 23.5% in the three months ended March 31, 2013. 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 2014, as well as costs associated with additional lease model centers opened in 2013 and 2014.

Selling, General and Administrative Expenses ("SGA"). SGA decreased $8.2 million, or 18.8%, to $35.4 million for the three months ended March 31, 2014 compared to $43.6 million for the same period in the prior year, and as a percentage of revenue decreased to 10.7% from 15.6% in the same period in the prior year. Results for the three months ended March 31, 2014 included $0.6 million of costs associated with a secondary offering. Results for the three months ended March 31, 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") and approximately $1.5 million of costs related to the acquisition of Kidsunlimited, which was completed on April 10, 2013. After taking these respective charges into account, SGA increased over the comparable period due to continued investments in technology and marketing, incremental overhead associated with the operations of acquired businesses, an increase in compensation costs, as well as routine increases in SGA costs.

Amortization. Amortization expense on intangible assets increased to $7.7 million for the three months ended March 31, 2014, from $6.7 million for the three months ended March 31, 2013, due to acquisitions made in 2013.

Income from Operations. Income from operations increased by $18.6 million, or 120.3%, to $34.0 million for the three months ended March 31, 2014 when compared to the same period in 2013. Income from operations was 10.2% of revenue for the three months ended March 31, 2014, compared to 5.5% of revenue for the three months ended March 31, 2013. The increase in income from operations was due to the following:

In the full service center-based care segment, income from operations increased $13.2 million for the three months ended March 31, 2014. Results for the three months ended March 31, 2014 included $0.6 million of acquisition related costs. Results for the three months ended March 31, 2013 included a proportionate share of the sponsor termination fee and performance-based stock compensation charge discussed above of $9.8 million, and costs of $1.5 million related to the acquisition of Kidsunlimited. In addition to these items, income from operations increased over the comparable period due to the tuition increases and enrollment gains over the prior year as well as contributions from new centers that have been added since March 31, 2013.

Income from operations for the back-up dependent care segment increased $4.2 million in the three months ended March 31, 2014. Results for the three months ended March 31, 2013 included a proportionate share of the Sponsor termination fee and performance-based stock compensation charge discussed above of $1.9 million. In addition to these items, income from operations improved in the three months ended March 31, 2014 due to the expanding revenue base.

Income from operations in the other educational advisory services segment increased $1.2 million for the three months ended March 31, 2014 compared to the same period in 2013. Results for the three months ended March 31, 2013 included a proportionate share of the Sponsor termination fee and performance-based stock compensation charge discussed above of $0.8 million.

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.

Net Interest Expense and Other. Net interest expense and other decreased to $8.7 million for the three months ended March 31, 2014 from $13.3 million for the same period in 2013 due to the debt refinancing completed on January 30, 2013, which reduced the borrowings outstanding as well as the interest rate on such borrowings.

Income Tax Expense. We recorded income tax expense of $9.2 million during the three months ended March 31, 2014 compared to an income tax benefit of $10.7 million during the comparable period in the prior year. The effective rate increased to 36.5% for the three months ended March 31, 2014 compared to 17.4% in the three months ended March 31, 2013. This increase was due to the minimal impact of similar permanent differences on higher projected pre-tax income for the year ending December 31, 2014. The impact of the permanent items in 2013 was more significant in relation to the lower level of pre-tax income in the period.


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Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $8.8 million, or 18.2%, and $5.2 million, or 17.5%, respectively, for the three months ended March 31, 2014 over the comparable period in 2013 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 growth in the back-up dependent care business, offset by increases in SGA spending.

Adjusted Net Income. Adjusted net income increased $7.1 million, or 45.5%, for the three months ended March 31, 2014 when compared to the comparable period in 2013 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.


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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,
                                                      2014           2013
         Net income (loss)                          $  16,048      $ (50,781 )
         Interest expense, net                          8,727         13,268
         Income tax expense (benefit)                   9,236        (10,732 )
         Depreciation                                  11,881          9,698
         Amortization of intangible assets (a)          7,734          6,748

         EBITDA                                        53,626        (31,799 )
         Additional Adjustments:
         Straight-line rent expense (b)                   780            839
         Stock compensation expense (c)                 2,385          6,620
         Sponsor management fee (d)                        -           7,674
         Loss on extinguishment of debt (e)                -          63,682
         Expenses related to secondary offering           550             -
         Acquisition-related costs (f)                     -           1,499

         Total adjustments                              3,715         80,314

         Adjusted EBITDA                            $  57,341      $  48,515


         Income from operations                     $  34,011      $  15,437
         Performance-based stock compensation (c)          -           4,968
         Sponsor termination fee (d)                       -           7,500
         Expenses related to secondary offering           550             -
         Acquisition-related costs (f)                     -           1,499

         Adjusted income from operations            $  34,561      $  29,404


         Net income (loss)                          $  16,048      $ (50,781 )
         Income tax expense (benefit)                   9,236        (10,732 )

         Income (loss) before tax                      25,284        (61,513 )
         Stock compensation expense (c)                 2,385          6,620
         Sponsor management fee (d)                        -           7,674
         Amortization of intangible assets (a)          7,734          6,748
         Loss on extinguishment of debt (e)                -          63,682
         Expenses related to secondary offering           550             -
         Acquisition-related costs (f)                     -           1,499

         Adjusted income before tax                    35,953         24,710
         Income tax expense (g)                       (13,302 )       (9,143 )

         Adjusted net income                        $  22,651      $  15,567

(a) Represents amortization of intangible assets, including $5.0 million for the three months ended March 31, 2014 and 2013 associated with intangible assets recorded in connection with our going private transaction in May 2008.

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

(c) Represents non-cash stock-based compensation expense, including performance-based stock compensation charge in 2013.

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

(e) 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.


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

(g) Represents income tax expense calculated on adjusted income before tax at the effective rate of 37.0% in 2014 and 2013.

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.

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 give effect to the . . .

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