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BRIGHT HORIZONS FAMILY SOLUTIONS INC. - Quarter Report: 2014 March (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2014.

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission file number: 001-35780

 

 

BRIGHT HORIZONS FAMILY SOLUTIONS INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   80-0188269

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification Number)

200 Talcott Avenue South

Watertown, MA

  02472
(Address of principal executive offices)   (Zip code)

Registrant’s telephone number, including area code: (617) 673-8000

 

 

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)    YES  ¨    NO  x

As of April 18, 2014, the Company had 65,644,394 shares of common stock, $0.001 par value, outstanding.

 

 

 


Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.

FORM 10-Q

March 31, 2014

TABLE OF CONTENTS

 

     Page  

PART I. FINANCIAL INFORMATION

  

Item 1.  

Condensed Consolidated Financial Statements (unaudited)

     3   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     26   
Item 4.  

Controls and Procedures

     26   

PART II. OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     27   
Item 1A.  

Risk Factors

     27   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     27   
Item 3.  

Defaults Upon Senior Securities

     27   
Item 4  

Mine Safety Disclosures

     27   
Item 5.  

Other Information

     27   
Item 6.  

Exhibits

     28   

 

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Table of Contents

Item 1. Condensed Consolidated Financial Statements (unaudited)

BRIGHT HORIZONS FAMILY SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

     March 31,
2014
    December 31,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 75,734      $ 29,585   

Accounts receivable—net

     59,361        78,691   

Prepaid expenses and other current assets

     40,950        44,021   

Current deferred income taxes

     12,956        12,873   
  

 

 

   

 

 

 

Total current assets

     189,001        165,170   

Fixed assets—net

     393,467        390,894   

Goodwill

     1,096,567        1,096,283   

Other intangibles—net

     427,356        435,060   

Deferred income taxes

     229        236   

Other assets

     14,892        15,027   
  

 

 

   

 

 

 

Total assets

   $ 2,121,512      $ 2,102,670   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Current portion of long-term debt

   $ 7,900      $ 7,900   

Accounts payable and accrued expenses

     104,686        107,626   

Deferred revenue

     117,110        119,260   

Other current liabilities

     11,814        20,302   
  

 

 

   

 

 

 

Total current liabilities

     241,510        255,088   

Long-term debt

     755,101        756,323   

Deferred rent and related obligations

     38,860        37,467   

Other long-term liabilities

     22,518        19,006   

Deferred revenue

     8,692        5,761   

Deferred income taxes

     139,893        139,888   
  

 

 

   

 

 

 

Total liabilities

     1,206,574        1,213,533   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock, $0.001 par value; 25,000,000 shares authorized and no shares issued or outstanding at March 31, 2014 and December 31, 2013

     —          —     

Common stock, $0.001 par value; 475,000,000 shares authorized; 65,580,844 shares issued and outstanding at March 31, 2014; 65,302,814 shares issued and outstanding at December 31, 2013

     66        65   

Additional paid-in capital

     1,278,425        1,270,198   

Accumulated other comprehensive income

     2,941        1,416   

Accumulated deficit

     (366,494     (382,542
  

 

 

   

 

 

 

Total stockholders’ equity

     914,938        889,137   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,121,512      $ 2,102,670   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)

 

     Three months ended March 31,  
     2014     2013  

Revenue

   $ 332,155      $ 280,123   

Cost of services

     255,006        214,333   
  

 

 

   

 

 

 

Gross profit

     77,149        65,790   

Selling, general and administrative expenses

     35,404        43,605   

Amortization of intangible assets

     7,734        6,748   
  

 

 

   

 

 

 

Income from operations

     34,011        15,437   

Loss on extinguishment of debt

     —          (63,682

Interest income

     15        21   

Interest expense

     (8,742     (13,289
  

 

 

   

 

 

 

Income (loss) before income taxes

     25,284        (61,513

Income tax (expense) benefit

     (9,236     10,732   
  

 

 

   

 

 

 

Net income (loss)

     16,048        (50,781

Net loss attributable to non-controlling interest

     —          (38
  

 

 

   

 

 

 

Net income (loss) attributable to Bright Horizons Family Solutions Inc.

   $ 16,048      $ (50,743
  

 

 

   

 

 

 

Earnings (loss) per common share:

    

Common stock—basic

   $ 0.24      $ (0.91

Common stock—diluted

   $ 0.24      $ (0.91

Weighted average number of common shares outstanding:

    

Common stock—basic

     65,407,851        55,797,534   

Common stock—diluted

     67,209,378        55,797,534   

See notes to condensed consolidated financial statements.

 

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BRIGHT HORIZONS FAMILY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

     Three months ended March 31,  
     2014      2013  

Net income (loss)

   $ 16,048       $ (50,781

Other comprehensive income (loss):

     

Foreign currency translation adjustments

     1,525         (12,068
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     1,525         (12,068
  

 

 

    

 

 

 

Comprehensive income (loss)

     17,573         (62,849

Less: Comprehensive loss attributable to non-controlling interest

     —           (283
  

 

 

    

 

 

 

Comprehensive income (loss) attributable to Bright Horizons Family Solutions Inc.

   $ 17,573       $ (62,566
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements.

 

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BRIGHT HORIZONS FAMILY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three months ended March 31,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 16,048      $ (50,781

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     19,615        16,446   

Amortization of original issue discount and deferred financing costs

     753        502   

Loss on extinguishment of debt

     —          63,682   

Interest paid in kind

     —          2,143   

Gain (loss) on foreign currency transactions

     69        (37

Non-cash revenue and other

     (80     (80

Loss on disposal of fixed assets

     292        471   

Stock-based compensation

     2,385        6,620   

Deferred rent

     780        839   

Deferred income taxes

     (88     (70

Changes in assets and liabilities:

    

Accounts receivable

     19,353        5,015   

Prepaid expenses and other current assets

     3,995        (14,595

Accounts payable and accrued expenses

     (3,301     3,498   

Deferred revenue

     826        14,704   

Accrued rent and related obligations

     554        941   

Other assets

     154        1,157   

Other current and long-term liabilities

     (9,714     1,815   
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,641        52,270   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of fixed assets

     (14,431     (22,192

Proceeds from disposal of fixed assets

     140        —     

Settlement of purchase price for prior year acquisition

     175        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (14,116     (22,192
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings of long-term debt, net of issuance costs of $20.6 million

     —          769,360   

Extinguishment of long-term debt

     —          (972,468

Proceeds from initial public offering, net of issuance costs of $20.6 million

     —          234,944   

Principal payments of long-term debt

     (1,975     (1,975

Proceeds from issuance of common stock upon exercise of options

     3,985        1,672   

Proceeds from issuance of restricted stock

     4,709        —     

Tax benefit from stock-based compensation

     1,858        1,736   
  

 

 

   

 

 

 

Net cash provided by financing activities

     8,577        33,269   
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     47        (721
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     46,149        62,626   

Cash and cash equivalents—beginning of period

     29,585        34,109   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 75,734      $ 96,735   
  

 

 

   

 

 

 

NON-CASH TRANSACTIONS:

    

Fixed asset purchases recorded in accounts payable and accrued expenses

   $ 2,000      $ —     

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash payments of interest

   $ 8,283      $ 9,806   

Cash payments of taxes

   $ 8,218      $ 4,327   

See notes to condensed consolidated financial statements.

 

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Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization—Bright Horizons Family Solutions Inc. (“Bright Horizons” or the “Company”) provides workplace services for employers and families throughout the United States and the United Kingdom, and also in Puerto Rico, Canada, Ireland, the Netherlands, and India. Workplace services include center-based child care, education and enrichment programs, elementary school education, back-up dependent care (for children and elders), before and after school care, college preparation and admissions counseling, tuition reimbursement program management, and other family support services.

The Company provides its center-based child care services under two general business models: a profit and loss (“P&L) model, where the Company assumes the financial risk of operating a child care center; and a cost-plus model, where the Company is paid a fee by an employer client for managing a child care center on a cost-plus basis. The P&L model is further classified into two subcategories: (i) a sponsor model, where Bright Horizons provides child care and early educational services on either an exclusive or priority enrollment basis for employees of a specific employer sponsor; and (ii) a lease/consortium model, where the Company provides child care and early education services to the employees of multiple employers located within a specific real estate development (for example, an office building or office park), as well as to families in the surrounding community. In both our cost-plus and sponsor P&L models, the development of a new child care center, as well as ongoing maintenance and repair, is typically funded by an employer sponsor with whom the Company enters into a multi-year contractual relationship. In addition, employer sponsors typically provide subsidies for the ongoing provision of child care services for their employees. Under each model type, the Company retains responsibility for all aspects of operating the child care and early education center, including the hiring and paying of employees, contracting with vendors, purchasing supplies, and collecting tuition and related accounts receivable.

The Company also provides back-up dependent care services through our own centers and through our Back-Up Care Advantage (“BUCA”) program, which offers access to a contracted network of in-home care agencies and center-based providers in locations where we do not otherwise have centers with available capacity.

Basis of Presentation—Bright Horizons is majority-owned by investment funds affiliated with Bain Capital Partners, LLC as a result of a transaction in 2008 (the “Merger”), pursuant to which a wholly owned merger subsidiary was merged with and into Bright Horizons Family Solutions, Inc. (the “Predecessor”). As part of the transaction, a new basis of accounting was established and the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values.

The accompanying unaudited condensed consolidated balance sheet as of March 31, 2014 and the condensed consolidated statements of operations, comprehensive income (loss) and cash flows for the interim periods ended March 31, 2014 and 2013 have been prepared by the Company, in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required for complete financial statements by generally accepted accounting principles and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

In the opinion of the Company’s management, the Company’s unaudited consolidated balance sheet as of March 31, 2014 and the results of its consolidated operations and consolidated cash flows for the interim periods ended March 31, 2014 and 2013, reflect all adjustments (consisting only of normal and recurring adjustments) necessary to present fairly the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.

Public Offering—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 in exchange for $233.3 million, net of offering costs including $1.6 million expensed in 2012. The Company used the proceeds of the Offering, as well as certain amounts from the 2013 refinancing discussed below, to repay the principal and accumulated interest under its senior notes outstanding on January 30, 2013.

On January 11, 2013, 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 the Class A common stock into common stock, for which 475 million shares were authorized. The Company also authorized 25 million shares of undesignated preferred stock for issuance.

On June 19, 2013 and March 25, 2014, certain of the Company’s shareholders completed the sale of 9.8 million and 7.9 million shares, respectively, of the Company’s stock in secondary offerings (“the Secondaries”). The Company did not receive proceeds from the sale of shares in the Secondaries. The Company incurred $0.6 million during the year ended December 31, 2013 in relation to the 2013 secondary offering, as well as $0.6 million during the three months ended March 31, 2014 in relation to the 2014 secondary offering, which are included in selling, general and administrative expenses.

 

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2. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows (in thousands):

 

     Full service
center-based
care
    Back-up
dependent
care
     Other
educational
advisory
services
    Total  

Beginning balance at December 31, 2013

   $ 912,134      $ 160,145       $ 24,004      $ 1,096,283   

Adjustments to prior year acquisitions

     (315     —           (173     (488

Effect of foreign currency translation

     655        117         —          772   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2014

   $ 912,474      $ 160,262       $ 23,831      $ 1,096,567   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company also has intangible assets, which consist of the following at March 31, 2014 and December 31, 2013 (in thousands):

 

     Weighted average
amortization period
   Cost      Accumulated
amortization
    Net carrying
amount
 

March 31, 2014

          

Definite-lived intangibles:

          

Customer relationships

   14.5 years    $ 400,330       $ (161,353   $ 238,977   

Trade names

   8.1 years      6,099         (1,761     4,338   

Non-compete agreements

   5 years      56         (41     15   
     

 

 

    

 

 

   

 

 

 
        406,485         (163,155     243,330   
     

 

 

    

 

 

   

 

 

 

Indefinite-lived intangibles:

          

Trade names

   N/A      184,026         —          184,026   
     

 

 

    

 

 

   

 

 

 
      $ 590,511       $ (163,155   $ 427,356   
     

 

 

    

 

 

   

 

 

 

 

     Weighted average
amortization period
   Cost      Accumulated
amortization
    Net carrying
amount
 

December 31, 2013

          

Definite-lived intangibles:

          

Customer relationships

   14.5 years    $ 400,481       $ (153,939   $ 246,542   

Trade names

   8.1 years      6,072         (1,542     4,530   

Non-compete agreements

   5 years      54         (39     15   
     

 

 

    

 

 

   

 

 

 
        406,607         (155,520     251,087   
     

 

 

    

 

 

   

 

 

 

Indefinite-lived intangibles:

          

Trade names

   N/A      183,973         —          183,973   
     

 

 

    

 

 

   

 

 

 
      $ 590,580       $ (155,520   $ 435,060   
     

 

 

    

 

 

   

 

 

 

 

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The Company estimates that it will record amortization expense related to intangible assets existing as of March 31, 2014 as follows over the next five years (in thousands):

 

     Estimated
amortization
expense
 

Remainder of 2014

   $ 21,022   

2015

   $ 26,235   

2016

   $ 25,271   

2017

   $ 24,589   

2018

   $ 23,676   

3. ACQUISITIONS

As part of the Company’s growth strategy to expand through strategic and synergistic acquisitions, the Company has made the following acquisitions in the year ended December 31, 2013. The goodwill resulting from these acquisitions arises largely from synergies expected from combining the operations of the businesses acquired with our existing operations, as well as from benefits derived from the assembled workforce acquired.

2013 Acquisitions

Children’s Choice Learning Centers, Inc.

On July 22, 2013, the Company acquired the outstanding shares of Children’s Choice Learning Centers, Inc., an operator of 49 employer-sponsored child care centers throughout the United States, for cash consideration of $50.8 million, inclusive of certain adjustments. The purchase price was financed with available cash on hand and funds available under the Company’s revolving credit facility, which were repaid in the fourth quarter of 2013.

The purchase price for this acquisition has been allocated based on preliminary estimates of the fair values of the acquired assets and assumed liabilities at the date of acquisition as follows (in thousands):

 

     At acquisition date
as reported
September 30, 2013
    Measurement
period
adjustments
    At acquisition date
as reported
March 31, 2014
 

Accounts receivable

   $ 981      $ (126   $ 855   

Prepaid expenses and other assets

     334        411        745   

Fixed assets

     5,637        535        6,172   

Intangible assets

     12,800        (1,190     11,610   

Goodwill

     38,818        (2,303     36,515   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     58,570        (2,673     55,897   
  

 

 

   

 

 

   

 

 

 

Accounts payable and accrued expenses

     (3,441     (801     (4,242

Deferred revenue and parent deposits

     (885     18        (867
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     (4,326     (783     (5,109
  

 

 

   

 

 

   

 

 

 

Purchase price

   $ 54,244      $ (3,456   $ 50,788   
  

 

 

   

 

 

   

 

 

 

The allocation of the purchase price consideration was based on preliminary estimates of fair value; such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date) as the Company gathers additional information regarding the assets acquired and the liabilities assumed for the final settlement of the purchase price. During the three months ended March 31, 2014, the Company made adjustments to the purchase accounting for this acquisition consisting primarily of an increase to the estimated adjustment to the purchase price for the final settlement of working capital from $2.6 million to $3.5 million, which reduced goodwill and increased the corresponding amounts receivable recorded in other current assets.

The Company recorded goodwill of $36.5 million, which will be deductible for tax purposes as permitted under federal tax rules. Goodwill related to this acquisition is reported within the full service center-based care segment.

Intangible assets consist primarily of $11.3 million of customer relationships that will be amortized over approximately eleven years.

Kidsunlimited Group Limited

On April 10, 2013, the Company entered into a share purchase agreement with Lloyds Development Capital (Holdings) Limited and Kidsunlimited Group Limited pursuant to which it acquired 100% of Kidsunlimited, an operator of 64 nurseries throughout the United Kingdom for cash consideration of $68.9 million, subject to certain adjustments. The purchase price was financed with available cash on hand.

 

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The purchase price for this acquisition has been allocated based on estimates of the fair values of the acquired assets and assumed liabilities at the date of acquisition as follows (in thousands):

 

     At acquisition date
as reported
June 30, 2013
    Measurement
period
adjustments
    At acquisition date
as reported
March 31, 2014
 

Cash

   $ 4,888      $ —        $ 4,888   

Accounts receivable

     1,809        —          1,809   

Prepaid expenses and other assets

     2,509        —          2,509   

Fixed assets

     13,901        (192     13,709   

Favorable leases

     —          2,892        2,892   

Intangible assets

     17,442        765        18,207   

Goodwill

     55,349        (2,372     52,977   
  

 

 

   

 

 

   

 

 

 

Total assets acquired

     95,898        1,093        96,991   
  

 

 

   

 

 

   

 

 

 

Accounts payable and accrued expenses

     (9,450     3,798        (5,652

Unfavorable leasehold interests

     (1,759     (5,325     (7,084

Deferred revenue

     (12,853     8,378        (4,475

Other current liabilities

     —          (8,378     (8,378

Deferred taxes

     (2,735     245        (2,490
  

 

 

   

 

 

   

 

 

 

Total liabilities assumed

     (26,797     (1,282     (28,079
  

 

 

   

 

 

   

 

 

 

Purchase price

   $ 69,101      $ (189   $ 68,912   
  

 

 

   

 

 

   

 

 

 

The Company recorded goodwill of $53.0 million, which will not be deductible for tax purposes. Goodwill related to this acquisition is reported within the full service center-based care segment.

Intangible assets consist primarily of $15.9 million of customer relationships that will be amortized over approximately eight years. A deferred tax liability of $4.0 million was recorded related to the intangible assets for which the amortization is not deductible for tax purposes.

Pro Forma Information

The operating results for each of the acquisitions are included in the consolidated results of operations from the respective dates of acquisition. The following table presents consolidated pro forma information as if the acquisitions of Children’s Choice Learning Centers, Inc. and Kidsunlimited had occurred on January 1, 2012 (in thousands):

 

     Pro forma (Unaudited)  
     Three Months Ended
March 31, 2013
 

Revenue

   $ 308,599   

Net (loss) income attributable to Bright Horizons Family Solutions Inc.

   $ (49,396

The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as increased amortization expense related to the acquired intangible assets.

These acquired businesses contributed total revenues of $30.4 million in the three months ended March 31, 2014. The Company has also determined that the presentation of net income for each of those acquisitions, from the date of acquisition, is impracticable due to the integration of the operations upon acquisition.

 

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4. BORROWING ARRANGEMENTS

Outstanding borrowings were as follows at March 31, 2014 and December 31, 2013 (in thousands):

 

     March 31,
2014
    December 31,
2013
 

Term loans

   $ 780,125      $ 782,100   

Deferred financing costs and original issue discount

     (17,124     (17,877
  

 

 

   

 

 

 

Total debt

     763,001        764,223   

Less current maturities

     7,900        7,900   
  

 

 

   

 

 

 

Long-term debt

   $ 755,101      $ 756,323   
  

 

 

   

 

 

 

The effective interest rate for the term loans was 4.0% at March 31, 2014, which was the weighted average interest rate for the three months ended March 31, 2014. There were no borrowings outstanding on the revolving credit facility at March 31, 2014 with the full facility available for borrowings. The weighted average interest rate for the revolving credit facility was 5.0% for the three months ended March 31, 2014.

The Company incurred financing fees of $12.7 million and original issue discount costs of $7.9 million in connection with this refinance. These fees are being amortized over the terms of the related debt instruments. Amortization expense of deferred financing costs and original issue discount costs in the three months ended March 31, 2014 was $0.5 million and $0.3 million, respectively, which is included in interest expense.

The future principal payments under the new term loan at March 31, 2014 are as follows (in thousands):

 

Remainder of 2014

   $ 5,925   

2015

     7,900   

2016

     7,900   

2017

     7,900   

2018

     7,900   

Thereafter

     742,600   
  

 

 

 
   $ 780,125   
  

 

 

 

5. EARNINGS (LOSS) PER SHARE

Basic earnings per share is calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted-average common shares and potentially dilutive securities outstanding during the period.

Earnings per share is calculated using the two-class method, which requires the allocation of earnings to each class of common stock outstanding and to unvested share-based payment awards that participate in dividends with common stock, also referred to herein as unvested participating shares.

The Company’s unvested share-based payment awards include unvested shares awarded as restricted stock awards at the discretion of the Company’s Board of Directors. The restricted stock awards vest at the end of three years. The unvested shares participate equally in dividends. See Note 6 for a discussion of the current year unvested stock awards and issuances.

 

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Earnings per Share - Basic

The following table sets forth the computation of earnings per share using the two-class method for unvested participating shares (in thousands, except share and per share amounts):

 

     Three months ended
March 31,
 
     2014      2013  

Basic earnings per share:

     

Net income (loss) attributable to Bright Horizons Family Solutions Inc.

   $ 16,048       $ (50,743

Allocation of net income (loss) to common stockholders:

     

Common stock

   $ 15,988       $ (50,743

Unvested participating shares

     60         —     
  

 

 

    

 

 

 
   $ 16,048       $ (50,743
  

 

 

    

 

 

 

Weighted average number of common shares:

     

Common stock

     65,407,851         55,797,534   

Unvested participating shares

     245,107         —     

Earnings (loss) per share:

     

Common stock

   $ 0.24       $ (0.91
  

 

 

    

 

 

 

Earnings per Share - Diluted

The Company calculates diluted earnings per share for common stock using the more dilutive of (1) the treasury stock method, or (2) the two-class method. The following table sets forth the computation of diluted earnings per share using the two-class method for unvested participating shares (in thousands, except share and per share amounts):

 

     Three months ended
March 31,
 
     2014     2013  

Diluted earnings per share:

    

Earnings allocated to common stock

   $ 15,988      $ (50,743

Plus earnings allocated to unvested participating shares

     60        —     

Less adjusted earnings allocated to unvested participating shares

     (58     —     
  

 

 

   

 

 

 

Earnings allocated to common stock

   $ 15,990      $ (50,743
  

 

 

   

 

 

 

Weighted average number of common shares:

    

Common stock

     65,407,851        55,797,534   

Dilutive effect of stock options

     1,801,527        —     
  

 

 

   

 

 

 
     67,209,378        55,797,534   
  

 

 

   

 

 

 

Earnings (loss) per share:

    

Common stock

   $ 0.24      $ (0.91
  

 

 

   

 

 

 

Options outstanding to purchase 0.9 million shares and 5.2 million shares of common stock were excluded from diluted earnings per share for the three months ended March 31, 2014 and the three months ended March 31, 2013, respectively, since their effect was anti-dilutive, which may be dilutive in the future.

 

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6. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Treasury Stock

On March 28, 2014, the Board of Directors of the Company authorized the potential repurchase of up to $225.0 million of its common stock. No purchases have been made under this program as of March 31, 2014.

Equity Incentive Plan

The Company has the 2012 Omnibus Long-Term Incentive Plan (the “Plan”), which became effective on January 24, 2013, and allows for the issuance of equity awards of up to 5 million shares of common stock. As of March 31, 2014, there were approximately 3.5 million shares of common stock available for grant.

During the three months ended March 31, 2014, the Company granted options to purchase 814,127 shares of common stock at a weighted average price of $36.29 per share that have ratable or cliff vesting over one to five years. The weighted average fair value of options granted during the three months ended March 31, 2014 was $11.10 per share. The fair value of each option to purchase common stock was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions: expected dividend yield of 0%; expected volatility of 30.0%; risk free interest rate of 1.82%; and expected life of options of 5.3 years.

Restricted stock awards are also granted at the discretion of the Board of Directors as allowed under the Plan. During the three months ended March 31, 2014, 259,525 shares of restricted stock were granted to certain senior managers and key employees, which vest at the end of three years and are accounted for as nonvested stock. The restricted stock was sold for a price equal to 50% of the fair value of the stock at the date of grant. Proceeds from the issuance of restricted stock are recorded as other liabilities in the consolidated balance sheet until the earlier of vesting or forfeiture of the awards. Stock-based compensation expense for restricted stock awards is calculated based on the fair value of the award on the date of grant, which will be recognized on a straight line basis over the requisite service period. At March 31, 2014, there were 259,525 unvested shares of restricted stock outstanding, which were legally issued at the date of grant but are not considered common stock issued and outstanding in accordance with accounting guidance until the requisite service period is fulfilled.

The Company recorded stock-based compensation expense of $2.4 million in selling, general and administrative expenses during the three months ended March 31, 2014.

At March 31, 2014, there was $18.3 million of total unrecognized compensation expense related to unvested share-based compensation arrangements granted under the plans, which is expected to be recognized over the remaining requisite service period.

7. INCOME TAXES

Our effective income tax rates were 36.5% and 17.4% for the three months ended March 31, 2014 and 2013, respectively. Our effective income tax rate is based upon estimated income before income taxes for the year, the geographical composition of the income and estimated permanent tax adjustments. The effective income tax rate for the three months ended March 31, 2013 varied from the statutory rate due to the greater impact of permanent adjustments on a lower income before income taxes in 2013. The income was lower in 2013 resulting from the loss on extinguishment of debt, the Sponsor termination fee and the performance-based stock compensation expense in 2013.

The effective tax rate may fluctuate from quarter to quarter for various reasons, including discrete items such as settlement of foreign, Federal and State tax issues.

The Company’s unrecognized tax benefits were $2.0 million at March 31, 2014 and December 31, 2013. Interest and penalties related to unrecognized tax benefits were $1.6 million at March 31, 2014 and December 31, 2013.

The Company expects the unrecognized tax benefits to change over the next twelve months if certain tax matters settle with the applicable taxing jurisdiction during this time frame, or, if the applicable statutes of limitations lapse. The impact of the amount of such changes to previously recorded uncertain tax positions could range from zero to $1.0 million, exclusive of interest and penalties.

The Company and its domestic subsidiaries are subject to U.S. Federal income tax as well as multiple state jurisdictions. U.S. Federal income tax returns are typically subject to examination by the Internal Revenue Service (IRS) and the statute of limitations for Federal income tax returns is three years. The Company’s filings for 2010 through 2013 are subject to audit based upon the Federal statute of limitations and there is an ongoing audit of the 2011 tax year.

 

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State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any Federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. There were no significant settlements of state audits during the first quarter of 2014. As of March 31, 2014, there were two income tax audits in process and the tax years from 2008 to 2013 are subject to audit.

The Company is also subject to corporate income tax at its subsidiaries located in the United Kingdom, the Netherlands, India, Canada, Ireland, and Puerto Rico. The tax returns for the Company’s subsidiaries located in foreign jurisdictions are subject to examination for periods ranging from one to seven years.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date and applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement. The hierarchy gives the highest priority to observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The Company uses observable inputs where relevant and whenever possible.

Level 1—Quoted prices are available in active markets for identical investments as of the reporting date.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The fair value of the Company’s financial instruments approximates their carrying value. As of March 31, 2014, the Company’s long-term debt had a book value of $780.1 million and a fair value of $781.1 million using quoted market prices and a model that considers observable inputs (level 2 inputs).

Financial instruments that potentially expose the Company to concentrations of credit risk consist mainly of cash and cash equivalents and accounts receivable. The Company mitigates its exposure by maintaining its cash and cash equivalents in financial institutions of high credit standing. The Company’s accounts receivable, which are derived primarily from the services it provides, are dispersed across many clients in various industries with no single client accounting for more than 10% of the Company’s net revenue or accounts receivable. The Company believes that no significant credit risk exists at March 31, 2014.

9. SEGMENT INFORMATION

Bright Horizons work/life services are primarily comprised of full service center-based child care, back-up dependent care, and other educational advisory services. Full service center-based care includes the traditional center-based child care, preschool, and elementary education, which have similar operating characteristics and meet the criteria for aggregation. Full service center-based care derives its revenues primarily from contractual arrangements with corporate clients and from tuition. The Company’s back-up dependent care services consist of center-based back-up child care, in-home care, mildly ill care, and adult/elder care. The Company’s other educational advisory services consists of the remaining services, including college preparation and admissions counseling and tuition assistance, counseling and management services, which do not meet the quantitative thresholds for separate disclosure and are not material for segment reporting individually or in the aggregate. The Company and its chief operating decision makers evaluate performance based on revenues and income from operations.

The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; thus, no additional information is produced or included herein.

 

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     Full service
center-based
care
     Back-up
dependent
care
     Other
educational
advisory
services
    Total  
     (In thousands)  

Three months ended March 31, 2014

          

Revenue

   $ 287,024       $ 37,456       $ 7,675      $ 332,155   

Amortization of intangible assets

     7,406         181         147        7,734   

Income from operations (1)

     22,011         11,692         308        34,011   

Three months ended March 31, 2013

          

Revenue

   $ 242,250       $ 33,161       $ 4,712      $ 280,123   

Amortization of intangible assets

     6,491         181         76        6,748   

Income (loss) from operations (2)

     8,872         7,467         (902     15,437   

 

(1) For the quarter ended March 31, 2014, income from operations includes secondary offering expenses of $0.6 million which has been allocated to full service center-based care.
(2) For the quarter ended March 31, 2013, income from operations includes expenses incurred in connection with the Offering, including a $7.5 million fee for the termination of the management agreement with Bain Capital Partners LLC, and $5.0 million for certain stock options that vested upon completion of the Offering, allocated on a proportionate basis to each segment ($9.8 million to full service center-based care, $1.9 million to back-up dependent care, and $0.8 million to other educational services).

10. TRANSACTIONS WITH RELATED PARTIES

The Company had a management agreement with Bain Capital Partners LLC (the “Sponsor”), which provided for annual payments of $2.5 million through May 2018. In connection with the Offering, the Company and the Sponsor terminated the management agreement in exchange for a $7.5 million payment from the Company to the Sponsor, which is included in selling, general and administrative expenses in the accompanying statement of operations for the three months ended March 31, 2013. As of March 31, 2014, investment funds affiliated with the Sponsor hold approximately 51.7% of our common stock.

 

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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 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 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 income, as defined above.

 

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Diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share are not presentations made in accordance with GAAP, and our use of the terms diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share may vary from similar measures reported by others in our industry due to the potential differences in the method of calculation. Diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share should not be considered as alternatives to earnings (loss) per share derived in accordance with GAAP. Diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share have important limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, we rely primarily on our GAAP results. However, we believe that presenting diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share is appropriate to provide additional information to investors to compare our performance prior to and after the completion of our initial public offering and related conversion of Class L shares into common as well as to provide investors with useful information regarding our historical operating results. The following table sets forth the computation of diluted earnings per pro forma common share and diluted adjusted earnings per pro forma common share:

 

     Three Months Ended
March 31,
 
     2014      2013  
     (In thousands, except share data)  

Diluted earnings (loss) per pro forma common share:

     

Net income (loss)

   $ 16,048       $ (50,781
  

 

 

    

 

 

 

Pro forma weighted average number of common shares—diluted:

     

Weighted average number of Class L shares over period in which Class L shares were outstanding (1)

     —           1,327,115   

Adjustment to weight Class L shares over respective period

     —           (1,179,658
  

 

 

    

 

 

 

Weighted average number of Class L shares over period

     —           147,457   

Class L conversion factor

     —           35.1955   
  

 

 

    

 

 

 

Weighted average number of converted Class L common shares

     —           5,189,831   

Weighted average number of common shares

     65,407,851         55,797,534   
  

 

 

    

 

 

 

Pro forma weighted average number of common shares—basic

     65,407,851         60,987,365   

Incremental dilutive shares (2)

     1,801,527         —     
  

 

 

    

 

 

 

Pro forma weighted average number of common shares—diluted

     67,209,378         60,987,365   
  

 

 

    

 

 

 

Diluted earnings (loss) per pro forma common share

   $ 0.24       $ (0.83
  

 

 

    

 

 

 

Diluted adjusted earnings per pro forma common share:

     

Adjusted net income

   $ 22,651       $ 15,567   
  

 

 

    

 

 

 

Pro forma weighted average number of common shares—basic

     65,407,851         60,987,365   

Incremental dilutive shares (2)

     1,801,527         1,763,218   
  

 

 

    

 

 

 

Pro forma weighted average number of common shares—diluted

     67,209,378         62,750,583   
  

 

 

    

 

 

 

Diluted adjusted earnings per pro forma common share

   $ 0.34       $ 0.25   
  

 

 

    

 

 

 

 

(1) The weighted average number of Class L shares in the actual Class L earnings per share calculation for the three months March 31, 2013 represents the weighted average from the beginning of the period up through the date of conversion of the Class L shares into common shares. As such, the pro forma weighted average number of common shares includes an adjustment to the weighted average number of Class L shares outstanding to reflect the length of time the Class L shares were outstanding prior to conversion relative to the respective three month periods. The converted Class L shares are already included in the weighted average number of common shares outstanding for the period after their conversion.
(2) Represents the dilutive effect of stock options using the treasury stock method. For purposes of the diluted loss per pro forma common share for the three months ended March 31, 2013, there is no dilutive effect since there was a loss recorded during the period.

 

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Liquidity and Capital Resources

Our primary cash requirements are for the ongoing operations of our existing child care centers, back-up dependent care and other educational advisory services, the addition of new centers through development or acquisition and debt financing obligations. Our primary sources of liquidity are our cash flows from operations and borrowings available under our $100.0 million revolving credit facility. No amounts were outstanding at March 31, 2014 or December 31, 2013 under the revolving credit facility.

We had a working capital deficit of $52.5 million and $89.9 million at March 31, 2014 and December 31, 2013, respectively. Our working capital deficit has arisen from using cash generated from operations to make long-term investments in fixed assets and acquisitions. We anticipate that we will continue to generate positive cash flows from operating activities and that the cash generated will be used principally to fund ongoing operations of our new and existing full service child care centers and expanded operations in the back-up dependent care and educational advisory segments, as well as to make scheduled principal and interest payments.

On January 30, 2013, we completed our initial public offering (the Offering), raising $234.9 million, net of expenses, underwriting discounts and commissions, including the exercise of the underwriters’ overallotment option which was completed on February 21, 2013. We used the net proceeds of our Offering and certain proceeds from the issuance of a $790.0 million senior secured term loan to redeem our senior notes in full for $213.3 million. We used the remainder of the $790.0 million senior secured term loan to refinance all of the remaining existing indebtedness under the senior credit facilities and the senior subordinated notes. The $790.0 million senior secured term loan has a maturity date in 2020 and is part of an $890.0 million senior credit facility, which includes a $100.0 million revolving credit facility due 2018.

On March 28, 2014, the Board of Directors of the Company approved a $225 million repurchase program of its common stock. No shares of common stock have been re-acquired as of March 31, 2014.

We believe that funds provided by operations, our existing cash and cash equivalent balances and borrowings available under our revolving line of credit will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions. However, if we were to undertake any significant acquisitions or investments in the purchase of facilities for new or existing child care and early education centers, which requires financing beyond our existing borrowing capacity, it may be necessary for us to obtain additional debt or equity financing. We may not be able to obtain such financing on reasonable terms, or at all. As part of our growth strategy, and in addition to making capital expenditures, we expect to continue to make selective acquisitions, which may vary in size and which are less predictable in terms of the timing of the capital requirements.

Cash Flows

 

     Three Months Ended March 31,  
     2014     2013  
     (in thousands)  

Net cash provided by operating activities

   $ 51,641      $ 52,270   

Net cash used in investing activities

   $ (14,116   $ (22,192

Net cash provided by financing activities

   $ 8,577      $ 33,269   

Cash and cash equivalents (beginning of period)

   $ 29,585      $ 34,109   

Cash and cash equivalents (end of period)

   $ 75,734      $ 96,735   

Cash Provided by Operating Activities

Cash provided by operating activities was $51.6 million for the three months ended March 31, 2014, compared to $52.3 million for the same period in 2013. Net income increased by $66.8 million, offset by a decrease in adjustments for non-cash expenses including depreciation, amortization and the loss on extinguishment of debt of $63.7 million recorded in the prior year.

Cash Used in Investing Activities

Cash used in investing activities was $14.1 million for the three months ended March 31, 2014, compared to $22.2 million for the same period in 2013, and related specifically to fixed asset additions, arising from the addition of new child care centers, maintenance and refurbishments in our existing centers, and continued investments in technology, equipment and furnishings.

 

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Cash Provided by Financing Activities

Cash provided by financing activities amounted to $8.6 million for the three months ended March 31, 2014 compared to $33.3 million for the same period in 2013. Cash provided by financing activities for the three months ended March 31, 2014 consisted principally of proceeds from the exercise of options to purchase common stock of $4.0 million, proceeds from the issuance of restricted stock of $4.7 million, and the tax benefit of stock compensation in the amount of $1.9 million, offset by quarterly principal installments of $2.0 million on our debt.

On January 30, 2013, we used the net proceeds of our Offering and certain proceeds from the exercise of the underwriter’s overallotment, as well as certain proceeds from the issuance of a $790.0 million senior secured term loan to redeem our senior notes in full for $213.3 million. We used the remainder of the proceeds from the new senior secured term loan to refinance all of the remaining existing indebtedness under the senior credit facilities and the senior subordinated notes.

Debt

Outstanding borrowings were as follows at March 31, 2014 and December 31, 2013 (in thousands):

 

     March 31, 2014     December 31, 2013  

Term loans

   $ 780,125      $ 782,100   

Less: Deferred financing costs and original issue discount

     (17,124     (17,877
  

 

 

   

 

 

 

Total debt

     763,001        764,223   

Less: Current maturities

     7,900        7,900   
  

 

 

   

 

 

 

Long-term debt

   $ 755,101      $ 756,323   
  

 

 

   

 

 

 

The $890.0 million senior secured credit facilities include the following terms:

 

    $790.0 million secured term loan facility with a maturity date in 2020;

 

    $100.0 million revolving credit facility with a maturity date in 2018, of which there were no borrowings outstanding at March 31, 2014, and the entire amount was available for borrowings as of that date; and

 

    applicable margin percentages for the loan facilities of 2.0% per annum for base rate loans and 3.0% per annum for LIBOR rate loans provided that the base rate for the term loan may not be lower than 2.0% and LIBOR may not be lower than 1.0%.

 

    Principal payments of $2.0 million are due quarterly with the final payment due on January 30, 2020.

The agreement governing our new senior secured credit facilities contains a number of covenants that, among other things and subject to certain exceptions, may restrict the ability of Bright Horizons Family Solutions LLC, our indirect subsidiary, and its restricted subsidiaries to:

 

    incur certain liens;

 

    make investments, loans, advances and acquisitions;

 

    incur additional indebtedness or guarantees;

 

    pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness;

 

    engage in transactions with affiliates;

 

    sell assets, including capital stock of our subsidiaries;

 

    alter the business we conduct;

 

    enter into agreements restricting our subsidiaries’ ability to pay dividends; and

 

    consolidate or merge.

In addition, the credit agreement governing the $890.0 million senior secured credit facilities requires Bright Horizons Capital Corp., our direct subsidiary, to be a passive holding company, subject to certain exceptions. The revolving credit facility requires Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries to comply with a maximum senior secured first lien net leverage ratio financial maintenance covenant, to be tested only if, on the last day of each fiscal quarter, revolving loans and/or swingline loans in excess of a specified percentage of the revolving commitments on such date are outstanding under the revolving credit facility. The breach of this covenant is subject to certain equity cure rights.

 

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The credit agreement governing the new senior secured credit facilities contains certain customary affirmative covenants and events of default. We were in compliance with our financial covenants at March 31, 2014.

Off-Balance Sheet Arrangements

As of March 31, 2014, we have no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Since December 31, 2013, there have been no significant changes in the Company’s exposures to interest rate or foreign currency rate fluctuations. The Company currently does not enter into derivatives or other market risk sensitive instruments for the purpose of hedging or for trading purposes.

Item 4. Controls and Procedures

As of March 31, 2014, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an updated version of its Internal Control—Integrated Framework (2013 Framework). Originally issued in 1992 (1992 Framework), the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. As of March 31, 2014, the Company continues to utilize the 1992 Framework during the transition to the 2013 Framework by the end of 2014.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, subject to claims and suits arising in the ordinary course of business. Such claims have in the past generally been covered by insurance. We believe the resolution of such legal matters will not have a material adverse effect on our financial condition, results of operations or cash flows, although we cannot predict the ultimate outcome of any such actions. Furthermore, there can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims brought against us.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

 

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Item 6. Exhibits

(a) Exhibits:

 

        31.1    Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
        31.2    Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
        32.1    Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
        32.2    Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Ex. 101.INS*    XBRL Instance Document
Ex. 101.SCH*    XBRL Taxonomy Extension Schema Document
Ex. 101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
Ex. 101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
Ex. 101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document
Ex. 101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document

 

* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BRIGHT HORIZONS FAMILY SOLUTIONS INC.      
Date:  

May 9, 2014

    By:  

/s/ David Lissy

      David Lissy
      Chief Executive Officer

 

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