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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, 2016
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
x
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if smaller reporting company)
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 22, 2016, the Company had 59,684,774 shares of common stock, $0.001 par value, outstanding.
 

Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.
FORM 10-Q
For the quarterly period ended March 31, 2016
TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4
Item 5.
Item 6.

2
Table of Contents

PART I. FINANCIAL INFORMATION
t
Item 1. Condensed Consolidated Financial Statements (Unaudited)
t                
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,152

 
$
11,539

Accounts receivable—net
84,312

 
97,295

Prepaid expenses and other current assets
35,195

 
43,879

Total current assets
159,659

 
152,713

Fixed assets—net
424,986

 
429,736

Goodwill
1,147,236

 
1,147,809

Other intangibles—net
382,111

 
389,331

Other assets
29,999

 
30,952

Total assets
$
2,143,991

 
$
2,150,541

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
9,550

 
$
9,550

Borrowings on revolving line of credit
—

 
24,000

Accounts payable and accrued expenses
118,677

 
114,776

Deferred revenue
146,739

 
137,283

Other current liabilities
26,715

 
19,734

Total current liabilities
301,681

 
305,343

Long-term debt—net
903,215

 
905,661

Deferred rent and related obligations
50,525

 
50,039

Other long-term liabilities
43,875

 
44,182

Deferred revenue
5,341

 
4,608

Deferred income taxes
111,286

 
113,100

Total liabilities
1,415,923

 
1,422,933

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 25,000,000 shares authorized and no shares issued or outstanding at March 31, 2016 and December 31, 2015
—

 
—

Common stock, $0.001 par value; 475,000,000 shares authorized; 59,714,161 and 60,008,136 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
60

 
60

Additional paid-in capital
964,071

 
983,398

Accumulated other comprehensive loss
(44,210
)
 
(39,270
)
Accumulated deficit
(191,853
)
 
(216,580
)
Total stockholders’ equity
728,068

 
727,608

Total liabilities and stockholders’ equity
$
2,143,991

 
$
2,150,541

See notes to condensed consolidated financial statements.

3
Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)

 
Three months ended March 31,
 
2016
 
2015
Revenue
$
385,322

 
$
350,440

Cost of services
289,546

 
263,832

Gross profit
95,776

 
86,608

Selling, general and administrative expenses
40,031

 
36,845

Amortization of intangible assets
7,148

 
6,922

Income from operations
48,597

 
42,841

Interest income
19

 
38

Interest expense
(10,703
)
 
(10,069
)
Income before income taxes
37,913

 
32,810

Income tax expense
(13,186
)
 
(10,278
)
Net income
$
24,727

 
$
22,532

 
 
 
 
Earnings per common share:
 
 
 
Common stock—basic
$
0.41

 
$
0.36

Common stock—diluted
$
0.40

 
$
0.35

Weighted average number of common shares outstanding:
 
 
 
Common stock—basic
59,832,168

 
61,682,964

Common stock—diluted
61,300,409

 
63,189,367

See notes to condensed consolidated financial statements.


4
Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

 
Three months ended March 31,
 
2016
 
2015
Net income
$
24,727

 
$
22,532

Other comprehensive income (loss):
 
 
 
       Foreign currency translation adjustments
(4,940
)
 
(16,883
)
       Total other comprehensive loss
(4,940
)
 
(16,883
)
       Comprehensive income
$
19,787

 
$
5,649

See notes to condensed consolidated financial statements.

5
Table of Contents

BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three months ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
24,727

 
$
22,532

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
20,525

 
19,386

Amortization of original issue discount and deferred financing costs
943

 
848

(Gain) loss on foreign currency transactions
(122
)
 
185

Non-cash revenue and other
(29
)
 
(80
)
(Gain) loss on disposal of fixed assets
(166
)
 
114

Stock-based compensation
2,597

 
2,300

Deferred rent
425

 
967

Deferred income taxes
(1,766
)
 
4,395

Changes in assets and liabilities:
 
 
 
Accounts receivable
12,905

 
8,180

Prepaid expenses and other current assets
8,601

 
(4,267
)
Accounts payable and accrued expenses
5,238

 
(6,912
)
Deferred revenue
10,183

 
(241
)
Accrued rent and related obligations
291

 
(200
)
Other assets
901

 
(808
)
Other current and long-term liabilities
544

 
863

Net cash provided by operating activities
85,797

 
47,262

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of fixed assets, net
(10,637
)
 
(16,911
)
Payments for acquisitions, net of cash acquired
(2,933
)
 
(1,072
)
Net cash used in investing activities
(13,570
)
 
(17,983
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings under revolving line of credit
65,600

 
—

Repayments under revolving line of credit
(89,600
)
 
—

Principal payments of long-term debt
(2,388
)
 
(2,388
)
Payments for debt issuance costs
(1,002
)
 
—

Purchase of treasury stock
(23,385
)
 
(738
)
Proceeds from issuance of common stock upon exercise of options
1,682

 
4,210

Proceeds from issuance of restricted stock
3,351

 
3,864

Tax benefit from stock-based compensation
1,920

 
3,072

Net cash (used in) provided by financing activities
(43,822
)
 
8,020

Effect of exchange rates on cash and cash equivalents
208

 
(1,524
)
Net increase in cash and cash equivalents
28,613

 
35,775

Cash and cash equivalents—beginning of period
11,539

 
87,886

Cash and cash equivalents—end of period
$
40,152

 
$
123,661

 
 
 
 
NON-CASH TRANSACTION:
 
 
 
Fixed asset purchases recorded in accounts payable and accrued expenses
$
3,000

 
$
2,000

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash payments of interest
$
9,794

 
$
9,334

Cash payments of taxes
$
3,806

 
$
11,503

See notes to condensed consolidated financial statements.

6
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.
Basis of Presentation—The accompanying unaudited condensed consolidated balance sheet as of March 31, 2016 and the condensed consolidated statements of income, comprehensive income and cash flows for the interim periods ended March 31, 2016 and 2015 have been prepared by the Company in accordance with accounting principles generally accepted in the U.S. 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 in accordance with generally accepted accounting principles for complete financial statements 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, 2015.
In the opinion of the Company’s management, the Company’s unaudited condensed consolidated balance sheet as of March 31, 2016 and the condensed consolidated statements of income, comprehensive income and cash flows for the interim periods ended March 31, 2016 and 2015, 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.
Stock Offerings—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. Subsequent to the Offering, certain of the Company's shareholders sold shares of the Company's common stock in secondary offerings ("secondary offerings") totaling 9.65 million, 15.9 million, and 9.8 million in the years ended December 31, 2015, 2014 and 2013, respectively. The Company did not receive proceeds from the sale of shares in the secondary offerings. The Company purchased 2.1 million and 4.5 million of the shares sold in the secondary offerings in 2015 and 2014, respectively, from investment funds affiliated with Bain Capital Partners, LLC at the same price per share paid by the underwriter to the selling shareholders.
As of March 31, 2016, investment funds affiliated with Bain Capital Partners, LLC held approximately 27.6% of our common stock.
New Accounting Pronouncements— In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09: Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods with early adoption permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This standard amends the existing guidance and requires lessees to recognize on the balance sheet assets and liabilities for the rights and obligations created by those leases with lease terms longer than twelve months. This update is effective for annual and interim reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied using a modified retrospective approach. Early adoption is permitted. The Company is in the process of evaluating the impact this standard will have on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. The FASB has subsequently issued various ASUs which amend or clarifies specific areas of the guidance. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration included in the transaction price and allocating the transaction price to each separate performance obligation. This new guidance is effective for the Company beginning January 1, 2018 and can be adopted using either a full retrospective or modified approach. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Company's consolidated financial statements.

7
Table of Contents

In 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments and ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. These standards were effective January 1, 2016, which did not have an impact on the Company's consolidated financial statements.
2. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the year ended December 31, 2015 and the three months ended March 31, 2016 are as follows (in thousands):
 
Full service
center-based
care
 
Back-up
dependent
care
 
Other
educational
advisory
services
 
Total
Balance at January 1, 2015
$
913,043

 
$
158,894

 
$
23,801

 
$
1,095,738

Additions from acquisitions
62,838

 
—

 
—

 
62,838

Adjustments to prior year acquisitions
(15
)
 
—

 
—

 
(15
)
Effect of foreign currency translation
(10,752
)
 
—

 
—

 
(10,752
)
Balance at December 31, 2015
965,114

 
158,894

 
23,801

 
1,147,809

Additions from acquisitions
2,100

 
—

 
—

 
2,100

Adjustments to prior year acquisitions
(7
)
 
—

 
—

 
(7
)
Effect of foreign currency translation
(2,666
)
 
—

 
—

 
(2,666
)
Balance at March 31, 2016
$
964,541

 
$
158,894

 
$
23,801

 
$
1,147,236

The Company also has intangible assets, which consist of the following at March 31, 2016 and December 31, 2015 (in thousands):
 
Weighted average
amortization period
 
Cost
 
Accumulated
amortization
 
Net carrying
amount
March 31, 2016
 
 
 
 
 
 
 
Definite-lived intangibles:
 
 
 
 
 
 
 
Customer relationships
14 years
 
$
410,056

 
$
(213,889
)
 
$
196,167

Trade names
8 years
 
5,964

 
(2,894
)
 
3,070

Non-compete agreements
5 years
 
53

 
(49
)
 
4

 
 
 
416,073

 
(216,832
)
 
199,241

Indefinite-lived intangibles:
 
 
 
 
 
 
 
Trade names
N/A
 
182,870

 
—

 
182,870

 
 
 
$
598,943

 
$
(216,832
)
 
$
382,111

 
Weighted average
amortization period
 
Cost
 
Accumulated
amortization
 
Net carrying
amount
December 31, 2015
 
 
 
 
 
 
 
Definite-lived intangibles:
 
 
 
 
 
 
 
Customer relationships
14 years
 
$
410,205

 
$
(207,257
)
 
$
202,948

Trade names
8 years
 
6,046

 
(2,748
)
 
3,298

Non-compete agreements
5 years
 
53

 
(48
)
 
5

 
 
 
416,304

 
(210,053
)
 
206,251

Indefinite-lived intangibles:
 
 
 
 
 
 
 
Trade names
N/A
 
183,080

 
—

 
183,080

 
 
 
$
599,384

 
$
(210,053
)
 
$
389,331


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The Company estimates that it will record amortization expense related to intangible assets existing as of March 31, 2016 as follows over the next five years (in thousands):
 
Estimated
amortization
expense
Remainder of 2016
$
22,009

2017
$
26,466

2018
$
25,142

2019
$
24,278

2020
$
23,859

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 three months ended March 31, 2016 and year ended December 31, 2015. 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.
2016 Acquisitions
During the three months ended March 31, 2016, the Company acquired three centers in the United Kingdom, which were accounted for as a business combination. The centers were acquired for cash consideration of $2.3 million. The Company recorded goodwill of $2.1 million related to the full service center-based care segment, a portion of which will be deductible for tax purposes. Intangible assets of $0.6 million, consisting primarily of customer relationships that will be amortized over five years, and a working capital deficit of $0.3 million were also recorded in relation to this acquisition.
The allocation of purchase price consideration is 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 of March 31, 2016, the purchase price allocation for this acquisition remains open as the Company gathers additional information regarding the assets acquired and the liabilities assumed. The operating results for the acquired business are included in the consolidated results of operations from the date of acquisition, which were not material to the Company's financial results.
2015 Acquisitions
On May 19, 2015, the Company acquired Hildebrandt Learning Centers, LLC, an operator of 40 centers in the United States, for cash consideration of $19.2 million and contingent consideration of $0.5 million, which was accounted for as a business combination. The Company recorded goodwill of $13.2 million related to the full service center-based care segment, which will be deductible for tax purposes, and intangible assets of $5.7 million, consisting of customer relationships that will be amortized over 12 years. The Company also acquired working capital of $0.3 million, including cash of $1.5 million, and fixed assets of $0.5 million.
On July 15, 2015, the Company acquired Active Learning Childcare Limited, an operator of nine centers in the United Kingdom, for cash consideration of $42.2 million, which was accounted for as a business combination. The Company recorded goodwill of $31.1 million related to the full service center-based care segment, which will not be deductible for tax purposes, and intangible assets of $3.8 million, consisting primarily of customer relationships that will be amortized over five years. The Company also acquired a working capital deficit of $1.8 million, including cash of $2.8 million, fixed assets of $9.8 million, and deferred tax liabilities of $0.7 million.
Our acquisitions of Hildebrandt Learning Centers, LLC and Active Learning Childcare Limited contributed approximately $14.0 million of incremental revenue in the three months ended March 31, 2016.
During the year ended December 31, 2015, the Company also acquired four additional centers in the United States and four additional centers in the United Kingdom, in six separate business acquisitions which were each accounted for as business combinations. The centers were acquired for cash consideration of $20.5 million and contingent consideration of $0.8 million net of cash acquired of $0.3 million. The Company recorded goodwill of $18.5 million related to the full service center-based care segment, a portion of which will be deductible for tax purposes. Intangible assets of $2.7 million, consisting primarily of customer relationships that will be amortized over five years, were also recorded in relation to these acquisitions. Contingent consideration of $0.5M related to one of these acquisitions was paid during the three months ended March 31, 2016.
The allocation of purchase price consideration is 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 of March 31,

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2016, the purchase price allocation for seven of these eight acquisitions remains open as the Company gathers additional information regarding the assets acquired and the liabilities assumed. The operating results for the acquired businesses are included in the consolidated results of operations from the dates of acquisition, which were not material to the Company's financial results.
4. CREDIT ARRANGEMENTS AND DEBT OBLIGATIONS
The Company's $1.2 billion senior credit facilities consist of $955.0 million in secured term loan facilities and a $225.0 million revolving credit facility. In conjunction with a debt refinancing in January 2013, $790.0 million in senior secured term loans were issued, with the subsequent issuance of $165.0 million in additional term loans in December 2014. The term loans mature on January 30, 2020.
Outstanding term loan borrowings were as follows at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31,
2016
 
December 31,
2015
Term loans
$
927,262

 
$
929,650

Deferred financing costs and original issue discount
(14,497
)
 
(14,439
)
Total debt
912,765

 
915,211

Less current maturities
9,550

 
9,550

Long-term debt
$
903,215

 
$
905,661

On January 26, 2016, the Company amended its existing credit agreement to increase the revolving credit facility from $100.0 million to $225.0 million, to extend the maturity date on the revolving credit facility from January 30, 2018 to July 31, 2019, and to modify the interest rate applicable to borrowings under the revolving credit facility to a range of 1.25% to 1.75% over the base rate and 2.25% to 2.75% over the Eurocurrency rate. There were no borrowings outstanding at March 31, 2016 on the revolving credit facility and there were $24.0 million in borrowings outstanding at December 31, 2015.
The effective interest rate for the term loans was 3.84% and 4.09% at March 31, 2016 and 2015, respectively, and the weighted average interest rate was 4.05% and 3.91% for the three months ended March 31, 2016 and 2015, respectively. The weighted average interest rate for the revolving credit facility was 4.6% and 5.0% for the three months ended March 31, 2016 and 2015, respectively.
The Company incurred financing fees of $15.4 million and original issue discount costs of $9.6 million in connection with debt refinancings. 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, 2016 were $0.6 million and $0.4 million, respectively, which are included in interest expense. Amortization expense of deferred financing costs and original issue discount costs in the three months ended March 31, 2015 were $0.5 million and $0.4 million, respectively.
The future principal payments under the term loans at March 31, 2016 are as follows (in thousands):
Remainder of 2016
$
7,162

2017
9,550

2018
9,550

2019
9,550

2020
891,450

 
$
927,262

5. EARNINGS 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 stock-based payment awards that participate equally in dividends with common stock, also referred to herein as unvested participating shares.
The Company’s unvested stock-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 generally vest at the end of three years.

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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,
 
2016
 
2015
Basic earnings per share:
 
 
 
Net income
$
24,727

 
$
22,532

 
 
 
 
Allocation of net income to common stockholders:
 
 
 
Common stock
$
24,517

 
$
22,386

Unvested participating shares
210

 
146

 
$
24,727

 
$
22,532

 
 
 
 
Weighted average number of common shares:
 
 
 
Common stock
59,832,168

 
61,682,964

Unvested participating shares
512,477

 
400,965

 
 
 
 
Earnings per share:
 
 
 
Common stock
$
0.41

 
$
0.36

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,
 
2016
 
2015
Diluted earnings per share:
 
 
 
Earnings allocated to common stock
$
24,517

 
$
22,386

Plus earnings allocated to unvested participating shares
210

 
146

Less adjusted earnings allocated to unvested participating shares
(205
)
 
(142
)
Earnings allocated to common stock
$
24,522

 
$
22,390

 
 
 
 
Weighted average number of common shares:
 
 
 
Common stock
59,832,168

 
61,682,964

Effect of dilutive securities
1,468,241

 
1,506,403

 
61,300,409

 
63,189,367

 
 
 
 
Earnings per share:
 
 
 
Common stock
$
0.40

 
$
0.35

Options outstanding to purchase 0.5 million and 0.4 million shares of common stock were excluded from diluted earnings per share for the three months ended March 31, 2016 and 2015 respectively, since their effect was anti-dilutive, which may be dilutive in the future.
6. INCOME TAXES
The Company's effective income tax rates were 34.8% and 31.3% for the three months ended March 31, 2016 and 2015, respectively. The effective income tax rate is based upon estimated income before income taxes for the year, by

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jurisdiction, and estimated permanent tax adjustments. The effective income 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 $0.8 million and $0.7 million at March 31, 2016 and December 31, 2015, respectively. There were no interest and penalties related to unrecognized tax benefits at March 31, 2016 and December 31, 2015.
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 $0.8 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 2012 through 2014 are subject to audit based upon the Federal statute of limitations. An audit of a subsidiary's filing for 2013 began in the second quarter of 2015 and is expected to be settled in 2016.
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 was one state audit completed with no material adjustment during the first quarter of 2016. As of March 31, 2016, there were two state income tax audits still in process and the tax years from 2010 to 2014 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.
7. 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, revolving line of credit, and long-term debt. The fair value of the Company’s financial instruments, other than long-term debt, approximates their book value. The carrying value and estimated fair value of the Company's long-term debt as of March 31, 2016 and December 31, 2015 were as follows (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Financial liabilities
 
 
 
 
 
 
 
Long-term debt
$
927,262

 
$
926,100

 
$
929,650

 
$
924,700

The estimated fair value of the Company's long-term debt is based on quoted market prices for similar instruments and a model that considers observable inputs. Judgment is required to develop these estimates. As such, our long-term debt is classified as Level 2, as defined by U.S. GAAP.
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

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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, 2016.
8. SEGMENT INFORMATION
Bright Horizons' workplace 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, tuition reimbursement program administration, and related consulting 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 and, as a result, no additional information is produced or included herein.
 
Full service
center-based
care
 
Back-up
dependent
care
 
Other
educational
advisory
services
 
Total
 
(In thousands)
Three months ended March 31, 2016
 
 
 
 
 
 
 
Revenue
$
328,827

 
$
45,131

 
$
11,364

 
$
385,322

Amortization of intangible assets
6,823

 
181

 
144

 
7,148

Income from operations (1)
32,891

 
13,206

 
2,500

 
48,597

Three months ended March 31, 2015
 
 
 
 
 
 
 
Revenue
$
300,334

 
$
41,601

 
$
8,505

 
$
350,440

Amortization of intangible assets
6,597

 
181

 
144

 
6,922

Income from operations
28,275

 
13,761

 
805

 
42,841

(1) For the three months ended March 31, 2016, income from operations includes $0.2 million of expenses related to the January 2016 amendment to the Credit Agreement and to completed acquisition costs, which have been allocated to full service center-based care.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements
This Quarterly 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 Quarterly 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, the industries in which we and our partners operate, the impact of accounting principles, pronouncements and policies, the outcome of acquisitions and the subsequent integration and expected synergies, our fair value estimates, the vesting of Company equity, the recognition of compensation expense, unrecognized tax benefits and the impact of uncertain tax positions, our tax rates, the outcome of tax audits and tax liabilities, our credit risk, the impact of seasonality on results of operations, the outcome of litigation and our insurance coverage, the cost, timing and impact of the remediation of our material weakness in internal control over financial reporting, borrowings under our credit facility, the need for additional debt or equity financings and our ability to obtain such financing, our sources of cash flow, our ability to fund operations, make capital expenditures and payments, and complete share repurchases with cash and cash equivalents and borrowings, and our ability to meet financial obligations and comply with covenants of our credit facility.
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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other factors disclosed from time to time in our other filings with the Securities and Exchange Commission.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.
Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments, except as may be required by law.
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, 2016 compared to the three months ended March 31, 2015. 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, 2015.
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 (profit and

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loss versus cost-plus) of new and existing centers, the timing and level of sponsorship payments, competitive factors and general economic conditions.
Results of Operations
The following table sets forth statement of income data as a percentage of revenue for the three months ended March 31, 2016 and 2015 (in thousands, except percentages):
 
Three Months Ended March 31,
 
2016
 
%
 
2015
 
%
Revenue
$
385,322

 
100.0
 %
 
$
350,440

 
100.0
 %
Cost of services (1)
289,546

 
75.1
 %
 
263,832

 
75.3
 %
Gross profit
95,776

 
24.9
 %
 
86,608

 
24.7
 %
Selling, general and administrative expenses (2)
40,031

 
10.4
 %
 
36,845

 
10.5
 %
Amortization of intangible assets
7,148

 
1.9
 %
 
6,922

 
2.0
 %
Income from operations
48,597

 
12.6
 %
 
42,841

 
12.2
 %
Net interest expense and other
(10,684
)
 
(2.8
)%
 
(10,031
)
 
(2.9
)%
Income before income tax
37,913

 
9.8
 %

32,810


9.3
 %
Income tax expense
(13,186
)
 
(3.4
)%
 
(10,278
)
 
(2.9
)%
Net income
$
24,727

 
6.4
 %
 
$
22,532

 
6.4
 %
Adjusted EBITDA (3)
$
72,350

 
18.8
 %
 
$
65,494

 
18.7
 %
Adjusted income from operations (3)
$
48,803

 
12.7
 %
 
$
42,841

 
12.2
 %
Adjusted net income (3)
$
31,112

 
8.1
 %
 
$
27,111

 
7.7
 %
(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, payroll taxes and benefits for personnel, food costs, program supplies and materials, and parent marketing and facilities costs, which include occupancy costs and depreciation.
(2)
Selling, general and administrative expenses consist primarily of salaries, payroll taxes and benefits (including stock-based 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 below.
Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
Revenue. Revenue increased $34.9 million, or 10%, to $385.3 million for the three months ended March 31, 2016 from $350.4 million for the same period in 2015. 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 educational advisory services, and typical annual tuition increases of 3-4%. Revenue generated by full service center-based care services in the three months ended March 31, 2016 increased by $28.5 million, or 9%, when compared to the same period in 2015, due in part to overall enrollment increases of approximately 6%. Our acquisitions of Hildebrandt Learning Centers, LLC, an operator of 40 centers in the United States on May 19, 2015, and of Active Learning Childcare Limited, an operator of 9 centers in the United Kingdom on July 15, 2015, contributed approximately $14.0 million of incremental revenue in the full service center-based care services segment during the quarter. At March 31, 2016, we operated 936 child care and early education centers compared to 885 centers at March 31, 2015.
Revenue generated by back-up dependent care services in the three months ended March 31, 2016 increased by $3.5 million, or 9%, when compared to the same period in 2015. Additionally, revenue generated by other educational advisory services in the three months ended March 31, 2016 increased by $2.9 million, or 34%, when compared to the same period in 2015.
Cost of Services. Cost of services increased $25.7 million, or 10%, to $289.5 million for the three months ended March 31, 2016 from $263.8 million for the same period in 2015. Cost of services in the full service center-based care services segment increased $21.2 million, or 9%, to $258.2 million in the three months ended March 31, 2016 when compared to the same period in 2015. Personnel costs, which typically represent approximately 70% of total cost of services for this segment, increased 10% as a result of enrollment growth at new and existing centers, routine wage and benefit cost increases, and labor costs associated with centers we have added since March 31, 2015 that are in the ramping stage. In addition, program supplies, materials, food and facilities costs, which typically represent approximately 30% of total costs of services for this segment, increased 6% in

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connection with the enrollment growth and the incremental occupancy costs associated with centers that have been added since March 31, 2015. Cost of services in the back-up dependent care segment increased $3.6 million, or 16%, to $25.7 million in the three months ended March 31, 2016, primarily for investments in information technology and personnel, and increased care provider fees associated with the services provided to the expanding revenue base. Cost of services in the other educational advisory services segment increased $0.9 million, or 19%, to $5.7 million in the three months ended March 31, 2016 due to increases in personnel and technology costs related to the incremental sales of these services.
Gross Profit. Gross profit increased $9.2 million, or 11%, to $95.8 million for the three months ended March 31, 2016 from $86.6 million for the same period in 2015. Gross profit margin as a percentage of revenue was 25% for the three months ended March 31, 2016, which is consistent with the same period in 2015. The increase in gross profit is primarily due to contributions from new and acquired centers, increased enrollment in our mature and ramping profit and loss centers, effective operating cost management, and expanded other educational advisory services.
Selling, General and Administrative Expenses ("SGA"). SGA increased $3.2 million, or 9%, to $40.0 million for the three months ended March 31, 2016 compared to $36.8 million for the same period in 2015, and was 10% of revenue for the three months ended March 31, 2016, which is consistent with the same period in 2015. SGA increased over the comparable 2015 period due to increases in personnel costs including annual wage increases, continued investments in technology and routine increases in other SGA costs.
Amortization. Amortization expense on intangible assets of $7.1 million for the three months ended March 31, 2016 increased from $6.9 million for the same period in 2015 due to the acquisitions completed in 2015 offset by decreases from certain intangible assets becoming fully amortized during the period.
Income from Operations. Income from operations increased by $5.8 million, or 13%, to $48.6 million for the three months ended March 31, 2016 when compared to the same period in 2015. Income from operations was 13% of revenue for the three months ended March 31, 2016, compared to 12% of revenue for the three months ended March 31, 2015. The increase in income from operations was due to the following:
•
In the full service center-based care segment, income from operations increased $4.6 million for the three months ended March 31, 2016 when compared to the same period in 2015. Income from operations increased over the comparable period due to tuition increases and enrollment gains over the prior year as well as contributions from new centers that have been added since March 31, 2015, and effective cost management, partially offset by the costs incurred during the ramp-up of certain new lease/consortium centers opened during 2015 and 2016.
•
Income from operations for the back-up dependent care segment decreased $0.6 million in the three months ended March 31, 2016 when compared to the same period in 2015 due to investments in information technology and personnel and increased care provider fees associated with services provided to the expanding revenue base.
•
Income from operations in the other educational advisory services segment increased $1.7 million for the three months ended March 31, 2016 compared to the same period in 2015 due to the expanding revenue base.
Net Interest Expense and Other. Net interest expense and other increased to $10.7 million for the three months ended March 31, 2016 from $10.0 million for the same period in 2015 due to borrowings on our line of credit for the three months ended March 31, 2016.
Income Tax Expense. We recorded income tax expense of $13.2 million during the three months ended March 31, 2016 compared to $10.3 million during the comparable period in 2015 at an effective rate of 35% for the three months ended March 31, 2016 and 31% for the three months ended March 31, 2015. The difference between the effective income tax rates is primarily attributable to a $1.3 million benefit recorded in the first quarter of 2015 related to the adjustment of certain permanent and temporary items. We expect that the annual effective rate for the full year 2016 will approximate 35%.
Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $6.9 million, or 10%, and $6.0 million, or 14%, respectively, for the three months ended March 31, 2016 over the same period in 2015 primarily as a result of the increase in gross profit due to additional contributions from full-service centers, including the impact of new and acquired centers, as well as growth in other educational advisory services.
Adjusted Net Income. Adjusted net income increased $4.0 million, or 15%, for the three months ended March 31, 2016 when compared to the same period in 2015 primarily due to the incremental gross profit described above, which was offset by increases in interest expense.

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Non-GAAP Reconciliations
In our quarterly and annual reports, earnings press releases and conference calls, we discuss key financial measures that are not calculated in accordance with GAAP. A reconciliation of the non-GAAP measures of adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per share are as follows (in thousands, except share data):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Net income
$
24,727

 
$
22,532

Interest expense, net
10,684

 
10,031

Income tax expense
13,186

 
10,278

Depreciation
13,377

 
12,464

Amortization of intangible assets (a)
7,148

 
6,922

EBITDA
69,122

 
62,227

Additional Adjustments:
 
 
 
Deferred rent (b)
425

 
967

Stock-based compensation expense (c)
2,597

 
2,300

Expenses related to the Credit Agreement amendment and completed acquisitions (d)
206

 
—

Total adjustments
3,228

 
3,267

Adjusted EBITDA
$
72,350

 
$
65,494

 
 
 
 
Income from operations
$
48,597

 
$
42,841

Expenses related to the Credit Agreement amendment and completed acquisitions (d)
206

 
—

Adjusted income from operations
$
48,803

 
$
42,841

 
 
 
 
Net income
$
24,727

 
$
22,532

Income tax expense
13,186

 
10,278

Income before tax
37,913

 
32,810

Stock-based compensation expense (c)
2,597

 
2,300

Amortization of intangible assets (a)
7,148

 
6,922

Expenses related to the Credit Agreement amendment and completed acquisitions (d)
206

 
—

Adjusted income before tax
47,864

 
42,032

Adjusted income tax expense (e)
(16,752
)
 
(14,921
)
Adjusted net income
$
31,112

 
$
27,111

Weighted average number of common shares—diluted
61,300,409

 
63,189,367

Diluted adjusted earnings per common share
$
0.51

 
$
0.43

(a)
Represents amortization of intangible assets, including approximately $4.5 million and $5.0 million for the three months ended March 31, 2016 and 2015, respectively, associated with intangible assets recorded in connection with our going private transaction in May 2008.
(b)
Represents rent expense 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 Topic 840, Leases.
(c)
Represents non-cash stock-based compensation expense.
(d)
Represents costs incurred in connection with the January 2016 amendment to the Credit Agreement and completed acquisitions.
(e)
Represents income tax expense calculated on adjusted income before tax at the effective rate of approximately 35% and 36% in 2016 and 2015, respectively.

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Adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are not presentations made in accordance with GAAP, and the use of the terms adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share may differ from similar measures reported by other companies. We believe that adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share provide investors with useful information with respect to our historical operations. We present adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share 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-based compensation expense, as well as the expenses related to secondary offerings and acquisitions. In addition, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share 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, adjusted net income and diluted adjusted earnings per common share 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, diluted earnings per common share, 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, adjusted net income and diluted adjusted earnings per common share 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.
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 revolving credit facility. There were no borrowings outstanding at March 31, 2016 and $24.0 million in borrowings outstanding at December 31, 2015.
We had a working capital deficit of $142.0 million and $152.6 million at March 31, 2016 and December 31, 2015, respectively. Our working capital deficit has arisen from using cash generated from operations to make long-term investments in fixed assets and acquisitions and from share repurchases. 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 other educational advisory segments, as well as to make scheduled principal and interest payments and for share repurchases.
The Company's $1.2 billion senior credit facilities consist of $955.0 million in secured term loan facilities and a $225.0 million revolving credit facility. In conjunction with a debt refinancing in January 2013, $790.0 million in senior secured term loans were issued, with the subsequent issuance of $165.0 million in additional term loans in December 2014. On January 26, 2016, the Company amended its existing credit agreement to increase the revolving credit facility from $100.0 million to $225.0 million as further discussed below under "Debt".
On February 4, 2015, the Board of Directors of the Company approved a $250.0 million repurchase program of its common stock. The repurchase program has no expiration date and replaced the prior 2014 authorization under which $221.6

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million was repurchased. The Company repurchased 0.4 million shares of common stock for $25.5 million in the three months ended March 31, 2016. All repurchased shares have been retired.
We believe that funds provided by operations, our existing cash balances and borrowings available under our revolving credit facility 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.
Cash Flows
 
Three Months Ended March 31,
 
2016
 
2015
 
(In thousands)
Net cash provided by operating activities
$
85,797

 
$
47,262

Net cash used in investing activities
$
(13,570
)
 
$
(17,983
)
Net cash (used in) provided by financing activities
$
(43,822
)
 
$
8,020

Cash and cash equivalents (beginning of period)
$
11,539

 
$
87,886

Cash and cash equivalents (end of period)
$
40,152

 
$
123,661

Cash Provided by Operating Activities
Cash provided by operating activities was $85.8 million for the three months ended March 31, 2016, compared to $47.3 million for the same period in 2015. The increase in cash provided by operating activities resulted from changes in working capital arising from an increase in deferred revenue due to growth and the timing of collections, lower cash tax payments in the period and the timing of other routine operating expenses. In addition, the increase in net income contributed $2.2 million, which was partially offset by changes in non-cash items.
Cash Used in Investing Activities
Cash used in investing activities was $13.6 million for the three months ended March 31, 2016 and was related to fixed asset additions for new child care centers, maintenance and refurbishments in our existing centers, and continued investments in technology, equipment and furnishings, as well as investments in acquisitions. The Company used $2.9 million primarily to acquire three centers in the three months ended March 31, 2016. Cash used in investing activities was $18.0 million for the same period in 2015 and primarily related to fixed asset additions. The Company also acquired one center for $1.1 million in the three months ended March 31, 2015.
Cash (Used in) Provided by Financing Activities
Cash used in financing activities amounted to $43.8 million for the three months ended March 31, 2016 compared to cash provided by financing activities of $8.0 million for the same period in 2015. The increase in cash used in financing activities was primarily due to cash used for share repurchases and repayments of borrowings on the revolving credit facility. For the three months ended March 31, 2016 share repurchases totaled $23.4 million, net repayments of borrowings on the revolving credit facility totaled $24.0 million, and principal payments on our debt were $2.4 million. These uses of cash were offset by proceeds from the issuance and sale of restricted stock of $3.4 million, proceeds from the exercise of options to purchase common stock of $1.7 million, and the tax benefit of stock-based compensation in the amount of $1.9 million. Cash provided by financing activities for the three months ended March 31, 2015 consisted principally of proceeds from the exercise of options to purchase common stock of $4.2 million, proceeds from the issuance and sale of restricted stock of $3.9 million, and the tax benefit of stock-based compensation in the amount of $3.1 million, offset by principal payments on our debt of $2.4 million.
Debt
As of March 31, 2016, the Company's $1.2 billion senior credit facilities consisted of $955.0 million in secured term loan facilities and a $225.0 million revolving credit facility. The term loans mature on January 30, 2020 and require quarterly principal payments of $2.4 million, with the remaining principal balance due on January 30, 2020.

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Outstanding term loan borrowings were as follows at March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
December 31, 2015
Term loans
$
927,262

 
$
929,650

Deferred financing costs and original issue discount
(14,497
)
 
(14,439
)
Total debt
912,765

 
915,211

Less current maturities
9,550

 
9,550

Long-term debt
$
903,215

 
$
905,661

On January 26, 2016, the Company amended its existing credit agreement to increase the revolving credit facility from $100.0 million to $225.0 million, to extend the maturity date on the revolving credit facility from January 30, 2018 to July 31, 2019, and to modify the interest rate applicable to borrowings under the revolving credit facility to a range of 1.25% to 1.75% over the base rate and 2.25% to 2.75% over the Eurocurrency rate. There were no borrowings outstanding at March 31, 2016 on the revolving credit facility and there were $24.0 million in borrowings outstanding at December 31, 2015.
All borrowings under the credit agreement are subject to variable interest rates. Applicable margin percentages for the loan facilities range from 1.25% to 2.50% per annum for base rate loans and 2.25% to 3.50% per annum for LIBOR rate loans as defined in the credit agreement, provided that the Base Rate for the term loan may not be lower than 2.0% and LIBOR may not be lower than 1%.
All obligations under the senior secured credit facilities are secured by substantially all of the assets of the Company's U.S. based subsidiaries. The credit agreement governing the $1.2 billion 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 wholly-owned 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 conducted; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate or merge.
In addition, the credit agreement governing the 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.
The credit agreement governing the senior secured credit facilities contains certain customary affirmative covenants and events of default. We were in compliance with our financial covenants at March 31, 2016.
Off-Balance Sheet Arrangements
As of March 31, 2016, we had no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since December 31, 2015, 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
Evaluation of Disclosure Controls and Procedures
As of March 31, 2016, 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”). The term "disclosure controls and procedures" means controls and other procedures of a company that are designed 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

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Table of Contents

and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective as of March 31, 2016 due to the material weakness in internal control over financial reporting described below.
Remediation of the Material Weakness
As disclosed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015, our management concluded that our internal control over financial reporting was not effective at December 31, 2015. As of December 31, 2014, management identified a material weakness in internal control over financial reporting related to information technology general controls in the areas of user access and program change management related to certain information systems that are relevant to the preparation of the Company's consolidated financial statements and system of internal control over financial reporting. While the Company has implemented a number of remediation efforts over the course of fiscal 2015 with respect to the identified deficiencies, as discussed in Item 9A of our Annual Report on Form 10-K, the material weakness had not been remediated as of December 31, 2015.
We are actively engaged in completing the remediation plan that was implemented in 2015 to ensure that controls contributing to this material weakness are designed appropriately and also operate effectively. We expect that our remediation efforts will continue through 2016, although the material weakness will not be considered remediated until the applicable internal controls operate for a sufficient period of time, and management has concluded, through testing, that these controls are operating effectively.
Notwithstanding the identified material weakness and the conclusion above that our disclosure controls and procedures were not effective as of March 31, 2016, management believes that the consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except for our remediation efforts described above.

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Table of Contents

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, some of which have not been fully adjudicated. 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
Our operations and financial results are subject to various risks and uncertainties, including those disclosed in Part I, Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which could adversely affect our business, financial condition and operating results. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information regarding the Company's repurchases of its common stock during the three months ended March 31, 2016:
Period
 
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet Be  Purchased Under the Plans or Programs (In thousands) (1)
January 1, 2016 to January 31, 2016
 
167,791

$
62.28

167,791

$
111,449

February 1, 2016 to February 29, 2016
 
133,710

$
62.24

133,710

$
103,127

March 1, 2016 to March 31, 2016
 
106,410

$
63.35

106,410

$
96,386

 
 
407,911

 
407,911

 
(1)
On February 4, 2015, the Board of Directors of the Company authorized the repurchase of up to $250.0 million of its common stock. The repurchase program has no expiration date and replaced the prior share repurchase authorization from March 2014. The share repurchases during the three months ended March 31, 2016 were open market transactions pursuant to the February 2015 authorization. All repurchased shares have been retired.
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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Table of Contents

Item 6. Exhibits
(a) Exhibits:
10.1
Extension and Incremental Amendment, dated as of January 26, 2016, by and among Bright Horizons Family Solutions LLC, the Extending Revolving Credit Lenders party thereto, the Incremental Revolving Credit Lenders party thereto, and Goldman Sachs Bank USA, as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K dated January 27, 2016)
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
 
*
Exhibits filed herewith.
**
Exhibits furnished herewith.


23
Table of Contents

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 6, 2016
By:
/s/ David Lissy
 
 
 
David Lissy
 
 
 
Chief Executive Officer


24
Exhibit



Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER, BRIGHT HORIZONS FAMILY SOLUTIONS INC.
I, David Lissy, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Bright Horizons Family Solutions Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2016
 
/s/ David Lissy
Date
 
David Lissy
 
 
Chief Executive Officer




Exhibit


Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER, BRIGHT HORIZONS FAMILY SOLUTIONS INC.
I, Elizabeth Boland, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Bright Horizons Family Solutions Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2016
 
/s/ Elizabeth Boland
Date
 
Elizabeth Boland
 
 
Chief Financial Officer




Exhibit



Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bright Horizons Family Solutions Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Lissy, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ David Lissy
David Lissy
Chief Executive Officer
Dated: May 6, 2016

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bright Horizons Family Solutions Inc. and will be retained by Bright Horizons Family Solutions Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit



Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bright Horizons Family Solutions Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elizabeth Boland, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Elizabeth Boland
Elizabeth Boland
Chief Financial Officer
Dated: May 6, 2016
 
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Bright Horizons Family Solutions Inc. and will be retained by Bright Horizons Family Solutions Inc. and furnished to the Securities and Exchange Commission or its staff upon request.