Bright Horizons Family Solutions Inc.: Form 10-Q for the period ended Mar 31, 2023

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 and liquidity; our recovery from the COVID-19 pandemic and the impact on industry, geographic, labor, workplace and demographic trends; the timing to re-enroll and re-ramp centers as well as certain back-up care services and use types; enrollment recovery and occupancy improvement in the U.S. and internationally; our cost management and capital spending; labor costs and investments in employees and wages; future labor rates and labor markets for teachers and staff; continued contributions from our back-up care segment; availability, timing and impact of government relief and support programs; pricing strategies; leases; ability to respond to changing market conditions; our growth; our strategies; ability to regain and sustain business and strategic growth priorities; demand for services; our value proposition, client relations and partnerships; macroeconomic trends including inflation; investments in user experience, operations and strategic opportunities; impact of the Only About Children acquisition and timing of related payments; acquisitions, contributions and expected synergies; contingent consideration; our fair value estimates; goodwill from business combinations; estimates and impact of equity transactions; unrecognized tax benefits and the impact of uncertain tax positions; our effective tax rate; the outcome of tax audits, settlements and tax liabilities; impact of excess tax benefits; fluctuations and the impact of foreign currency exchange rates and interest rates; our capital allocation, share repurchase program and expected activity; amortization expense; the outcome of litigation, legal proceedings and our insurance coverage; debt securities; our interest rate cap and hedge agreements; interest expense; credit risk; the use of derivatives or other market risk sensitive instruments; our indebtedness; borrowings under our senior secured credit facilities, the need for additional debt or equity financing, and our ability to obtain such financing; our sources and uses of cash flow; our ability to fund operations and make capital expenditures and payments with cash and cash equivalents and borrowings; and our ability to meet financial obligations and comply with covenants of our senior secured credit facilities.

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 disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, as well as other factors disclosed from time to time in our other filings with the SEC.

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 required by law.

Overview

The following is a discussion of the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of Bright Horizons Family Solutions Inc. (“we” or the “Company”) for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

We are a leading provider of high-quality education and care, including early education and child care, back-up and family care solutions, and workforce education services that are designed to help families, employers and their employees solve the challenges of the modern workforce and thrive personally and professionally. We provide services primarily under multi-year contracts with employers who offer early education and child care, back-up care, and educational advisory and other services as part of their employee benefits packages in an effort to support employees across life and career stages and to improve recruitment, employee engagement, productivity, retention and career advancement.

As of March 31, 2023, we had more than 1,400 client relationships with employers across a diverse array of industries, including more than 215 Fortune 500 companies. As of March 31, 2023, we operated 1,076 early education and child care centers and had the capacity to serve approximately 120,000 children and their families in the United States, the United Kingdom, the Netherlands, Australia and India.

Our reportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory and other services. Full service center-based child care includes traditional center-based early education and child care, preschool, and elementary education. Back-up care consists of center-based back-up child care, in-home care for children and adult/elder dependents, school-age camps, virtual tutoring, pet care and self-sourced reimbursed care. Educational advisory and other services includes tuition assistance and student loan repayment program management, workforce education, related educational advising, college advisory services, and Sittercity, an online marketplace for families and caregivers.

Since March 2020, our global operations have been significantly impacted by the COVID-19 pandemic and the measures undertaken in response thereto. During the early stages of the pandemic, most of our child care centers were temporarily closed. We responded by quickly adapting to the changing environment and focusing on health and safety, supporting clients and their essential frontline workers and pivoting to expand back-up care solutions for clients and employees to meet the surge in need and demand. Nearly all of our centers are now re-opened. While we continue to navigate a dynamic operating environment as a result of the pandemic and disrupted staff availability as well as the effects of current macroeconomic conditions, such as inflation and fluctuations in interest rates and foreign currency exchange rates, during the three months ended March 31, 2023, we continued to see year-over-year enrollment growth as centers re-ramp. We also saw solid growth in back-up care and educational advisory and other services, as we continue to expand our portfolio of client partners, while providing high quality care and education services as we support working families and adult learners.

Results of Operations

The following table sets forth statement of income data as a percentage of revenue for the three months ended March 31, 2023 and 2022:

(1) Adjusted EBITDA, adjusted income from operations and adjusted net income are non-GAAP financial measures and are not determined in accordance with accounting principles generally accepted in the United States (“GAAP”). Refer to “Non-GAAP Financial Measures and Reconciliation” below for a reconciliation of these non-GAAP financial measures to their respective measures determined under GAAP and for information regarding our use of non-GAAP financial measures.

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Revenue. Revenue increased by $93.2 million, or 20%, to $553.6 million for the three months ended March 31, 2023 from $460.4 million for the same period in 2022. The following table summarizes the revenue and percentage of total revenue for each of our segments for the three months ended March 31, 2023 and 2022:

(In thousands, except percentages)

Revenue generated by the full service center-based child care segment in the three months ended March 31, 2023 increased by $76.3 million, or 22%, when compared to the same period in 2022. Revenue growth in this segment was attributable to contributions from the 75 child care centers acquired in Australia in July 2022 (“Only About Children”) and from enrollment gains and price increases at our existing child care centers. Tuition revenue increased by $70.9 million, or 22%, when compared to the prior year, due to revenue contributions during the quarter from Only About Children of $33.2 million and a 9% increase in enrollment at our existing centers. While we continue to see sequential enrollment growth at our centers, we continue to operate below pre-pandemic enrollment levels as ongoing labor market challenges and current economic conditions have slowed the recovery in both the U.S. and International markets. We expect continued occupancy improvement through the remainder of 2023, with more modest improvement in the U.K. Lower foreign currency exchange rates for our United Kingdom and Netherlands operations in the first quarter of 2023 compared to the same period in 2022 decreased 2023 tuition revenue by approximately 3%, or $9.7 million, which partially offset our revenue growth. While we expect to be impacted by fluctuations in the foreign currency exchange rates throughout the year, we do not expect fluctuations in foreign currency exchange rates to have a significant impact to the full year results for 2023. Additionally, during the three months ended March 31, 2023, $0.6 million was received from government programs related to tuition support that was recorded to revenue, which is a decrease from $2.0 million received in the same period in the prior year. We expect to receive less government support in 2023 as most of the programs for which we are eligible are currently expected to end by September 2023.

Management fees and operating subsidies from employer sponsors increased by $5.4 million, or 16%, due to higher operating subsidies required to support center operations as enrollment continues to increase, and due to a decrease in funding received from government support programs. Funding received from government support programs reduce certain center operating costs, which impact the related operating subsidies. During the three months ended March 31, 2023 and 2022, such funding reduced the operating subsidy revenue due from employers by $7.4 million and $9.5 million, respectively.

Revenue generated by back-up care services in the three months ended March 31, 2023 increased by $15.5 million, or 19%, when compared to the same period in 2022. Revenue growth in the back-up care segment was primarily attributable to increased utilization of center-based and in-home back-up care from new and existing clients, and expanded sales to new clients.

Revenue generated by educational advisory and other services in the three months ended March 31, 2023 increased by $1.5 million, or 6%, when compared to the same period in the prior year. Revenue growth in this segment was primarily attributable to contributions from sales to new clients and increased utilization from existing clients.

Cost of Services. Cost of services increased by $81.6 million, or 23%, to $432.0 million for the three months ended March 31, 2023 from $350.4 million for the same period in 2022.

Cost of services in the full service center-based child care segment increased by $64.5 million, or 22%, to $358.6 million in the three months ended March 31, 2023 when compared to the same period in 2022. The increase in cost of services was primarily associated with increased labor costs related to the increase in enrollment as well as the operating costs associated with the 75 Only About Children child care centers which were acquired July 1, 2022, and general market inflation. Personnel costs, which generally represent 70% of the costs for this segment, increased 23% primarily in connection with enrollment growth at our centers and higher average labor costs, including wage increases and premiums associated with temporary help, as well as the incremental costs associated with the Only About Children centers. Funding received from government support programs reduced center operating expenses by a total of $21.6 million in the first quarter of 2023, a decrease of $3.7 million compared to $25.3 million in government funding received in the first quarter of 2022. As noted above, a portion of the funding received from government support programs reduced the operating costs in certain employer-sponsored centers, which in turn reduced the operating subsidy revenue due from employers for the related child care centers by $7.4 million and $9.5 million in the three months ended March 31, 2023 and 2022, respectively.

Cost of services in the back-up care segment increased by $16.1 million, or 36%, to $60.6 million in the three months ended March 31, 2023, when compared to the prior year. The increase in cost of services is primarily associated with higher care provider fees generated by the increase in utilization levels of center-based and in-home back-up care over the prior year, and continued investment in personnel, marketing and technology to support our customer user experience and service delivery. In addition, cost of services includes a $4.3 million expense recorded in the three months ended March 31, 2023 related to value-added tax expense incurred in prior periods.

Cost of services in the educational advisory and other services segment increased by $1.0 million, or 9%, to $12.8 million in the three months ended March 31, 2023 when compared to the prior year, due to increased personnel costs related to delivering services to the expanding customer base.

Gross Profit. Gross profit increased by $11.6 million, or 10%, to $121.6 million for the three months ended March 31, 2023 from $110.1 million for the same period in 2022. Gross profit margin was 22% of revenue for the three months ended March 31, 2023, a decrease of approximately 2% compared to the three months ended March 31, 2022. The decrease was primarily due to value-added tax expense of $4.3 million related to prior periods.

Selling, General and Administrative Expenses (“SGA”). SGA increased by $11.0 million, or 15%, to $82.8 million for the three months ended March 31, 2023 from $71.7 million for the same period in 2022, on incremental spending to support the business as it continues to re-ramp, incremental costs associated with the Only About Children acquisition completed July 1, 2022, and the inclusion of a $1.7 million expense recorded for value-added tax expense incurred in prior periods. SGA was 15.0% of revenue for the three months ended March 31, 2023, generally consistent with the same period in 2022.

Amortization of Intangible Assets. Amortization expense on intangible assets was $8.2 million for the three months ended March 31, 2023, an increase from $7.1 million for the three months ended March 31, 2022, due to increases from intangible assets acquired in relation to the acquisitions completed in 2022, partially offset by decreases from intangible assets becoming fully amortized during the period.

Income from Operations. Income from operations decreased by $0.5 million, or 2%, to $30.6 million for the three months ended March 31, 2023 when compared to the prior year. The following table summarizes income from operations and percentage of revenue for each of our segments for the three months ended March 31, 2023 and 2022:

(In thousands, except percentages)

25

The decrease in income from operations was primarily due to the following:

• Income from operations for the full service center-based child care segment increased $1.3 million, or 18%, in the three months ended March 31, 2023 when compared to the same period in 2022 primarily due to increases in tuition revenue from enrollment growth and improved gross profit contributions, partially offset by a decrease of approximately $3 million in net contributions from government support programs and the inclusion of a $1.7 million expense recorded for value-added tax expense incurred in prior periods. We expect to receive less government support in 2023 as most of the programs for which we are eligible are currently expected to end by September 2023.
• Income from operations for the back-up care segment decreased $3.1 million, or 15%, in the three months ended March 31, 2023 when compared to the same period in 2022, due to value-added tax expense of $4.3 million related to prior periods and higher personnel, technology and marketing costs to support the growth in this segment, partially offset by contributions from the expanding revenue base from increased sales and utilization.
• Income from operations for the educational advisory and other services segment increased $1.3 million, or 37%, in the three months ended March 31, 2023 when compared to the same period in 2022 due to contributions from the expanding revenue base and cost management.

Net Interest Expense. Net interest expense increased to $12.9 million for the three months ended March 31, 2023 from $7.0 million for the same period in 2022 primarily due to increased borrowings under our revolving credit facility, higher interest rates applicable to our debt, and incremental interest associated with a deferred payment for the Only About Children acquisition. The blended weighted average interest rate for the term loans and revolving credit facility was 3.97% for three months ended March 31, 2023 compared to 2.34% for the three months ended March 31, 2022, inclusive of the effects of the cash flow hedges. Based on our current interest rate projections, we estimate that our overall weighted average interest rate will approximate 4.25% for the remainder of 2023.

Income Tax Expense. We recorded income tax expense of $9.6 million during the three months ended March 31, 2023, at an effective income tax rate of 54%, compared to an income tax expense of $4.7 million during the three months ended March 31, 2022, at an effective income tax rate of 20%. The difference between the effective income tax rate as compared to the statutory income tax rate was primarily due to the effects of excess (shortfall) tax benefit (expense) associated with the exercise or expiration of stock options and vesting of restricted stock, which had a more significant impact to the effective tax rate for 2023 due to the shortfall tax expense in 2023 compared to an excess tax benefit in 2022 and unbenefited losses of foreign subsidiaries. The effective income tax rate may fluctuate from quarter to quarter for various reasons, including changes to income before income tax, jurisdictional mix of income before income tax, valuation allowances, jurisdictional income tax rate changes, as well as discrete items such as non-deductible transaction costs, the settlement of foreign, federal and state tax matters and the effects of excess (shortfall) tax benefit (expense) associated with the exercise or expiration of stock options and vesting of restricted stock.

During the three months ended March 31, 2023, the net shortfall tax expense from stock-based compensation expense increased tax expense by $2.1 million. During the three months ended March 31, 2022, the excess tax benefits decreased income tax expense by $2.0 million. For the three months ended March 31, 2023 and 2022, prior to the inclusion of the excess (shortfall) tax benefit (expense), other discrete items and unbenefited losses in certain foreign jurisdictions, the effective tax rate approximated 30% and 27%, respectively.

Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA increased $7.0 million, or 11%, and adjusted income from operations increased $5.5 million, or 18% for the three months ended March 31, 2023 over the comparable period in 2022 primarily as a result of the increase in gross profit in the full service center-based child care segment.

Adjusted Net Income. Adjusted net income increased $0.6 million, or 2%, for the three months ended March 31, 2023 when compared to the same period in 2022, primarily due to the increase in adjusted income from operations, partially offset by higher interest expense and a higher effective tax rate.

Non-GAAP Financial Measures and Reconciliation

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 to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP financial measures of adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are reconciled from their respective measures determined under GAAP as follows:

(In thousands, except share data)

(a) Amortization of intangible assets represents amortization expense, including quarterly amortization expense of approximately $5.0 million associated with intangible assets recorded in connection with our going private transaction in May 2008.

(b) Stock-based compensation expense represents non-cash stock-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation.

(c) Other costs in the three months ended March 31, 2023 consist of value-added tax expense of $6.0 million related to prior periods, of which $4.3 million was associated with the back-up care segment and $1.7 million was associated with the full service center-based child care segment. Refer to Note 1, Organization and Basis of Presentation, to our condensed consolidated financial statements for additional information.

(d) Interest on deferred consideration represents the imputed interest on the deferred consideration issued in connection with the July 1, 2022 acquisition of Only About Children, a child care operator in Australia.

(e) Adjusted income tax expense represents income tax expense calculated on adjusted income before income tax at an effective tax rate of approximately 28% and 26% for the three months ended March 31, 2023 and 2022, respectively. The prior year tax rate included net excess income tax benefits related to equity transactions, which are not projected in 2023. The jurisdictional mix of the expected adjusted income before income tax for the full year will affect these estimates and the estimated effective tax rate for the year.

Adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share (collectively referred to as the “non-GAAP financial measures”) 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 and may not be comparable to other similarly titled measures. We believe the non-GAAP financial measures provide investors with useful information with respect to our historical operations. We present the non-GAAP financial measures 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, stock-based compensation expense and non-recurring costs, such as value-added-tax expense related to prior periods, and, at times, other non-recurring costs, such as, impairment costs and other costs incurred due to the impact of COVID-19, transaction costs, loss on foreign currency forward contracts, and net costs incurred in relation to a cyber incident. 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 non-GAAP financial measures also function as key performance indicators used to evaluate our operating performance internally, and they are used in connection with the determination of incentive compensation for management, including executive officers. Adjusted EBITDA is also used in connection with the determination of certain ratio requirements under our credit agreement.

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 (used in) 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. Consequently, our non-GAAP financial measures should be considered together with our consolidated financial statements, which are prepared in accordance with GAAP and included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We understand 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 our 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, our 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; and
• 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 early education and child care centers, back-up care, educational advisory and other services, the addition of new centers through development or acquisitions, and debt financing obligations. Our primary sources of liquidity are our existing cash, cash flows from operations, and borrowings available under our revolving credit facility. We had $44.6 million in cash ($59.9 million including restricted cash) at March 31, 2023, of which $31.9 million was held in foreign jurisdictions, compared to $36.2 million in cash ($51.9 million including restricted cash) at December 31, 2022, of which $22.4 million was held in foreign jurisdictions. Operations outside of North America accounted for 28% and 25% of our consolidated revenue in the three months ended March 31, 2023 and 2022, respectively. The net impact on our liquidity from changes in foreign currency exchange rates was not material for the three months ended March 31, 2023 and 2022. While we expect to be impacted by fluctuations in the foreign currency exchange rates throughout the year, we do not currently expect that the effects of changes in foreign currency exchange rates will have a material net impact on our liquidity, capital resources or results from operations for the remainder of 2023.

On July 1, 2022, we completed the acquisition of the outstanding shares of Only About Children, a child care operator in Australia, for aggregate consideration of AUD$450 million. We paid approximately AUD$300 million (USD$207 million), net of cash acquired, and will pay an additional USD$106.5 million 18 months after closing. The initial purchase price was financed with cash on hand. In addition, we funded AUD$14.1 million (USD$9.7 million) for cash-backed guarantees for leases that are recorded as restricted cash on our consolidated balance sheet.

Our $400 million revolving credit facility is part of our senior secured credit facilities, which also includes term loans. At March 31, 2023 and December 31, 2022, $350.3 million and $310.8 million of the revolving credit facility was available for borrowing, respectively.

We had a working capital deficit of $417.0 million and $438.6 million at March 31, 2023 and December 31, 2022, respectively. Our working capital deficit has primarily arisen from using cash to make long-term investments in fixed assets and acquisitions, deferred consideration issued in relation to an acquisition and from share repurchases. We anticipate that our cash flows from operating activities will continue to improve, but will be further impacted while our center enrollment re-ramps and performance continues to recover. As we focus on the enrollment and ramping of centers, we expect to continue to prioritize our capital allocation on investments that support current operations and strategic opportunities, as well as the principal and interest payments on our debt and revolver, and payment of deferred consideration.

During the three months ended March 31, 2023 and 2022, we participated in government support programs that were enacted in response to the economic impact of the COVID-19 pandemic, including certain tax deferrals and federal block grant funding in the United States. We expect to receive less government support in 2023 as most of the programs for which we are eligible are currently expected to end by September 30, 2023. During the three months ended March 31, 2023 and 2022, $21.6 million and $25.3 million, respectively, was recorded as a reduction to cost of services in relation to these benefits, of which $7.4 million and $9.5 million, respectively, reduced the operating subsidy revenue due from employers for the related child care centers. Additionally, during the three months ended March 31, 2023 and 2022, amounts received for tuition support of $0.6 million and $2.0 million, respectively, were recorded to revenue. As of March 31, 2023 and December 31, 2022, $2.5 million and $1.2 million, respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government support programs. As of March 31, 2023 and December 31, 2022, $4.2 million and $4.6 million, respectively, was recorded to other current liabilities related to government support received related to future periods.

The board of directors authorized a share repurchase program of up to $400 million of our outstanding common stock, effective December 16, 2021. The share repurchase program has no expiration date. During the three months ended March 31, 2023, we did not make any share repurchases, and at March 31, 2023, $198.3 million remained available under the repurchase program. During the three months ended March 31, 2022, we repurchased 0.3 million shares for $39.7 million. 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 fund all obligations and liquidity requirements for at least the next 12 months. However, if we were to experience renewed disruption from the COVID-19 pandemic or other similar global health crisis or if we were to undertake any significant acquisitions or make investments in the purchase of facilities for new or existing centers, we could require financing beyond our existing cash and borrowing capacity, and it could be necessary for us to obtain additional debt or equity financing. We may not be able to obtain such financing on reasonable terms, if at all.

(In thousands)

Cash Provided by Operating Activities

Cash provided by operating activities was $67.3 million for the three months ended March 31, 2023, compared to $58.6 million for the same period in 2022. The increase in cash provided by operations relates primarily to the payment of $5.4 million in 2022 for contingent consideration related to the post acquisition change in fair value, which did not occur in 2023. The other changes largely offset and are due to a larger amount of cash provided by working capital when compared to the prior year, arising from the timing of billings and payments, partially offset by the decrease in net income.

Cash Used in Investing Activities

Cash used in investing activities was $18.2 million for the three months ended March 31, 2023 compared to $9.4 million for the same period in 2022, an increase of $8.8 million. The increase in cash used in investing activities was primarily related to an increase in fixed asset purchases. During the three months ended March 31, 2023, we invested $19.3 million in fixed asset purchases for new child care centers, maintenance and refurbishments in our existing centers and technology, compared to an investment of $11.6 million during the same period in the prior year. Net proceeds received from debt securities and other investments were $1.2 million in the three months ended March 31, 2023, compared to net cash provided in investments of $2.4 million during the same period in the prior year.

Cash Used in Financing Activities

Cash used in financing activities was $41.0 million for the three months ended March 31, 2023 compared to $52.1 million for the same period in 2022. The decrease in cash used in financing activities was primarily related to payments of contingent consideration for acquisitions of $0.2 million compared to $13.9 million in 2022. Share repurchases of $39.9 million in 2022 did not occur in 2023 and are largely offset by net payments related to our revolving credit facility of $39.5 million in 2023, which did not occur in 2022. Additionally, proceeds received from the exercise of stock options and the issuance and sale of restricted stock in the three months ended March 31, 2023 decreased by $4.5 million compared to the prior year due to lower volume of transactions. Proceeds from the exercise of stock options were $4.3 million in the three months ended March 31, 2023 and proceeds received from the exercise of stock options and the issuance and sale of restricted stock were $8.8 million during the same period in 2022.

Debt

Our senior secured credit facilities consist of a $600 million term loan B facility (“term loan B”), a $400 million term loan A facility (“term loan A”) and a $400 million multi-currency revolving credit facility (“revolving credit facility”).

Long term debt obligations were as follows:

(In thousands)

On December 21, 2022, the Company amended its existing senior secured credit facilities to replace the LIBOR-based benchmark rate with a term SOFR benchmark rate, which did not alter the applicable interest rates held in effect prior to the change.

The seven year term loan B matures on November 23, 2028 and requires quarterly principal payments equal to 1% per annum of the original aggregate principal amount of the term loan B, with the remaining principal balance due at maturity. The five year term loan A matures on November 23, 2026 and requires quarterly principal payments equal to 2.5% per annum of the original aggregate principal amount of the term loan A in each of the first three years, 5.0% in the fourth year, and 7.5% in the fifth year. The remaining principal balance is due at maturity.

The revolving credit facility matures on May 26, 2026. At March 31, 2023, borrowings outstanding on the revolving credit facility were $44.5 million and letters of credit outstanding were $5.2 million. At December 31, 2022, borrowings outstanding on the revolving credit facility were $84.0 million and letters of credit outstanding were $5.2 million.

Borrowings under the credit facilities are subject to variable interest. We mitigate our interest rate exposure with interest rate cap agreements. In June 2020, we entered into interest rate cap agreements with a total notional value of $800 million. These interest rate cap agreements, designated and accounted for as cash flow hedges, provide us with interest rate protection in the event the one-month LIBOR rate increases above 1% (effective December 30, 2022, one-month term SOFR rate increases above 0.9%). Interest rate cap agreements for $300 million notional value have an effective date of June 30, 2020 and expire on October 31, 2023, while interest rate cap agreements for another $500 million notional amount have an effective date of October 29, 2021, and expire on October 31, 2023. In December 2021, we entered into interest rate cap agreements with a total notional value of $900 million designated and accounted for as cash flow hedges. Interest rate cap agreements for $600 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2025, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 2.5% (effective December 30, 2022, one-month term SOFR rate increases above 2.4%). Interest rate cap agreements for $300 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2026, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 3.0% (effective December 30, 2022, one-month term SOFR rate increases above 2.9%).

The blended weighted average interest rate for the term loans and revolving credit facility was 3.97% and 2.34% for the three months ended March 31, 2023 and 2022, respectively, including the impact of the cash flow hedges. Based on our current interest rate projections, we estimate that our overall weighted average interest rate will approximate 4.25% for the remainder of 2023.

The term loan A and the revolving credit facility require Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum first lien net leverage ratio. A 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 covenant at March 31, 2023. Refer to Note 6, Credit Arrangements and Debt Obligations, to our condensed consolidated financial statements for additional information on our debt and credit arrangements, future principal payments of long-term debt, and covenant requirements.

Critical Accounting Policies

For a discussion of our “Critical Accounting Policies,” refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies since December 31, 2022.

We are exposed to market risk from changes in interest rates and fluctuations in foreign currency exchange rates. We do not believe there have been material changes in our exposure to interest rate or foreign currency exchange rate fluctuations since December 31, 2022. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2022 for further information regarding market risk.

Evaluation of Disclosure Controls and Procedures

As of March 31, 2023, we conducted an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of the design and operation of our 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 that are designed to ensure that information required to be disclosed in reports that we file or submit 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 we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive 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 effective as of March 31, 2023.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition and operating results. We believe that these risks and uncertainties include, but are not limited to, those disclosed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties, not presently known to us or that we currently deem immaterial, could materially impair our business, financial condition or results of operations. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.