UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2020
2021
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File NumberNumber: 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 Talcott2 Wells Avenue | | | | | |
Watertown, | Newton, Massachusetts | | | | 0247202459 |
(Address(Address of principal executive offices) | | | | | (Zip code) |
Registrant’s telephone number, including area code: (617) 673-8000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | BFAM | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | Emerging growth company | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 24, 2020,29, 2021, there were 60,409,01360,560,617 shares of common stock outstanding.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
FORM 10-Q
For the quarterly period ended June 30, 20202021
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Condensed Consolidated Financial Statements (Unaudited)
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BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| | | | June 30, 2021 | | December 31, 2020 |
| | | June 30, 2020 | | December 31, 2019 | | (In thousands, except share data) |
ASSETS | ASSETS | | | | ASSETS | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 270,442 | | | $ | 27,872 | | Cash and cash equivalents | $ | 418,638 | | | $ | 384,344 | |
Accounts receivable — net of allowance for credit losses of $8,351 and $1,226 at June 30, 2020 and December 31, 2019, respectively | 221,532 | | | 148,855 | | |
Accounts receivable — net of allowance for credit losses of $2,402 and $2,357 at June 30, 2021 and December 31, 2020, respectively | | Accounts receivable — net of allowance for credit losses of $2,402 and $2,357 at June 30, 2021 and December 31, 2020, respectively | 141,253 | | | 176,617 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 84,947 | | | 52,161 | | Prepaid expenses and other current assets | 74,743 | | | 62,902 | |
| Prepaid income taxes | | Prepaid income taxes | 19,830 | | | 322 | |
Total current assets | Total current assets | 576,921 | | | 228,888 | | Total current assets | 654,464 | | | 624,185 | |
Fixed assets — net | Fixed assets — net | 596,947 | | | 636,153 | | Fixed assets — net | 617,248 | | | 628,757 | |
Goodwill | Goodwill | 1,391,650 | | | 1,412,873 | | Goodwill | 1,451,041 | | | 1,431,967 | |
Other intangible assets — net | Other intangible assets — net | 287,489 | | | 304,673 | | Other intangible assets — net | 261,013 | | | 274,620 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 713,687 | | | 700,956 | | Operating lease right-of-use assets | 703,107 | | | 717,821 | |
Other assets | Other assets | 44,902 | | | 46,877 | | Other assets | 54,010 | | | 49,298 | |
Total assets | Total assets | $ | 3,611,596 | | | $ | 3,330,420 | | Total assets | $ | 3,740,883 | | | $ | 3,726,648 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Current portion of long-term debt | Current portion of long-term debt | $ | 10,750 | | | $ | 10,750 | | Current portion of long-term debt | $ | 10,750 | | | $ | 10,750 | |
| Accounts payable and accrued expenses | Accounts payable and accrued expenses | 144,316 | | | 167,059 | | Accounts payable and accrued expenses | 190,554 | | | 194,551 | |
Current portion of operating lease liabilities | Current portion of operating lease liabilities | 92,457 | | | 83,123 | | Current portion of operating lease liabilities | 87,934 | | | 87,181 | |
Deferred revenue | Deferred revenue | 192,825 | | | 191,117 | | Deferred revenue | 225,683 | | | 197,939 | |
Other current liabilities | Other current liabilities | 51,199 | | | 31,241 | | Other current liabilities | 49,599 | | | 40,393 | |
Total current liabilities | Total current liabilities | 491,547 | | | 483,290 | | Total current liabilities | 564,520 | | | 530,814 | |
Long-term debt — net | Long-term debt — net | 1,024,801 | | | 1,028,049 | | Long-term debt — net | 1,015,433 | | | 1,020,137 | |
Operating lease liabilities | Operating lease liabilities | 724,375 | | | 685,910 | | Operating lease liabilities | 712,399 | | | 729,754 | |
Other long-term liabilities | Other long-term liabilities | 106,977 | | | 92,865 | | Other long-term liabilities | 117,822 | | | 105,980 | |
Deferred revenue | Deferred revenue | 10,765 | | | 10,098 | | Deferred revenue | 10,421 | | | 10,215 | |
Deferred income taxes | Deferred income taxes | 54,856 | | | 58,940 | | Deferred income taxes | 49,144 | | | 45,951 | |
Total liabilities | Total liabilities | 2,413,321 | | | 2,359,152 | | Total liabilities | 2,469,739 | | | 2,442,851 | |
Stockholders’ equity: | Stockholders’ equity: | | | | Stockholders’ equity: | | | |
Preferred stock, $0.001 par value; 25,000,000 shares authorized and 0 shares issued or outstanding at June 30, 2020 and December 31, 2019 | — | | | — | | |
Common stock, $0.001 par value; 475,000,000 shares authorized; 60,152,187 and 57,884,020 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | 60 | | | 58 | | |
Preferred stock, $0.001 par value; 25,000,000 shares authorized; 0 shares issued or outstanding at June 30, 2021 and December 31, 2020 | | Preferred stock, $0.001 par value; 25,000,000 shares authorized; 0 shares issued or outstanding at June 30, 2021 and December 31, 2020 | 0 | | | 0 | |
Common stock, $0.001 par value; 475,000,000 shares authorized; 60,278,756 and 60,466,168 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | | Common stock, $0.001 par value; 475,000,000 shares authorized; 60,278,756 and 60,466,168 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 60 | | | 60 | |
Additional paid-in capital | Additional paid-in capital | 885,373 | | | 648,031 | | Additional paid-in capital | 868,289 | | | 910,304 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (91,759) | | | (50,331) | | Accumulated other comprehensive loss | (23,654) | | | (27,069) | |
Retained earnings | Retained earnings | 404,601 | | | 373,510 | | Retained earnings | 426,449 | | | 400,502 | |
Total stockholders’ equity | Total stockholders’ equity | 1,198,275 | | | 971,268 | | Total stockholders’ equity | 1,271,144 | | | 1,283,797 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 3,611,596 | | | $ | 3,330,420 | | Total liabilities and stockholders’ equity | $ | 3,740,883 | | | $ | 3,726,648 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)
| | | | Three months ended June 30, | | Six months ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2021 | | 2020 |
| | Three months ended June 30, | | | Six months ended June 30, | | | | | | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | (In thousands, except share data) |
Revenue | Revenue | $ | 293,772 | | | $ | 528,060 | | | $ | 800,095 | | | $ | 1,029,818 | | Revenue | $ | 441,478 | | | $ | 293,772 | | | $ | 832,318 | | | $ | 800,095 | |
Cost of services | Cost of services | 228,536 | | | 388,439 | | | 626,000 | | | 763,250 | | Cost of services | 335,496 | | | 228,536 | | | 644,978 | | | 626,000 | |
Gross profit | Gross profit | 65,236 | | | 139,621 | | | 174,095 | | | 266,568 | | Gross profit | 105,982 | | | 65,236 | | | 187,340 | | | 174,095 | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 49,247 | | | 56,491 | | | 106,616 | | | 112,366 | | Selling, general and administrative expenses | 64,458 | | | 49,247 | | | 124,568 | | | 106,616 | |
Amortization of intangible assets | Amortization of intangible assets | 7,875 | | | 8,297 | | | 16,084 | | | 16,459 | | Amortization of intangible assets | 7,512 | | | 7,875 | | | 15,052 | | | 16,084 | |
| Income from operations | Income from operations | 8,114 | | | 74,833 | | | 51,395 | | | 137,743 | | Income from operations | 34,012 | | | 8,114 | | | 47,720 | | | 51,395 | |
Interest expense — net | Interest expense — net | (9,129) | | | (11,723) | | | (19,335) | | | (23,671) | | Interest expense — net | (9,580) | | | (9,129) | | | (18,596) | | | (19,335) | |
Income (loss) before income tax | Income (loss) before income tax | (1,015) | | | 63,110 | | | 32,060 | | | 114,072 | | Income (loss) before income tax | 24,432 | | | (1,015) | | | 29,124 | | | 32,060 | |
Income tax benefit (expense) | Income tax benefit (expense) | 1,374 | | | (13,783) | | | (969) | | | (22,703) | | Income tax benefit (expense) | (5,617) | | | 1,374 | | | (3,177) | | | (969) | |
Net income | Net income | $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
| Earnings per common share: | Earnings per common share: | | Earnings per common share: | |
Common stock — basic | Common stock — basic | $ | 0.01 | | | $ | 0.85 | | | $ | 0.53 | | | $ | 1.57 | | Common stock — basic | $ | 0.31 | | | $ | 0.01 | | | $ | 0.43 | | | $ | 0.53 | |
Common stock — diluted | Common stock — diluted | $ | 0.01 | | | $ | 0.83 | | | $ | 0.52 | | | $ | 1.55 | | Common stock — diluted | $ | 0.31 | | | $ | 0.01 | | | $ | 0.42 | | | $ | 0.52 | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: | |
Common stock — basic | Common stock — basic | 59,631,428 | | | 57,847,630 | | | 58,781,169 | | | 57,763,335 | | Common stock — basic | 60,551,528 | | | 59,631,428 | | | 60,573,237 | | | 58,781,169 | |
Common stock — diluted | Common stock — diluted | 60,266,102 | | | 58,939,763 | | | 59,572,444 | | | 58,846,073 | | Common stock — diluted | 61,106,792 | | | 60,266,102 | | | 61,216,383 | | | 59,572,444 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| | | | Three months ended June 30, | | Six months ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2021 | | 2020 |
| | Three months ended June 30, | | | Six months ended June 30, | | | | | | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | (In thousands) |
Net income | Net income | $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | |
Foreign currency translation adjustments | Foreign currency translation adjustments | 1,557 | | | (10,796) | | | (37,951) | | | (3,818) | | Foreign currency translation adjustments | 1,213 | | | 1,557 | | | 699 | | | (37,951) | |
Unrealized gain (loss) on cash flow hedges and investments, net of tax | Unrealized gain (loss) on cash flow hedges and investments, net of tax | 793 | | | (4,303) | | | (3,477) | | | (7,170) | | Unrealized gain (loss) on cash flow hedges and investments, net of tax | 964 | | | 793 | | | 2,716 | | | (3,477) | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | 2,350 | | | (15,099) | | | (41,428) | | | (10,988) | | Total other comprehensive income (loss) | 2,177 | | | 2,350 | | | 3,415 | | | (41,428) | |
Comprehensive income (loss) | Comprehensive income (loss) | $ | 2,709 | | | $ | 34,228 | | | $ | (10,337) | | | $ | 80,381 | | Comprehensive income (loss) | $ | 20,992 | | | $ | 2,709 | | | $ | 29,362 | | | $ | (10,337) | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
| | | Three months ended June 30, 2020 | | | Three months ended June 30, 2021 |
| | Common Stock | | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
Balance at April 1, 2020 | 57,920,154 | | | $ | 58 | | | $ | 627,337 | | | $ | — | | | $ | (94,109) | | | $ | 404,242 | | | $ | 937,528 | | |
Issuance of common stock | 2,138,580 | | | 2 | | | 249,788 | | | | | | | | | 249,790 | | |
| | | | (In thousands, except share data) |
Balance at April 1, 2021 | | Balance at April 1, 2021 | 60,726,701 | | | $ | 61 | | | $ | 928,761 | | | $ | 0 | | | $ | (25,831) | | | $ | 407,634 | | | $ | 1,310,625 | |
| Stock-based compensation expense | Stock-based compensation expense | | 5,155 | | | 5,155 | | Stock-based compensation expense | | 5,829 | | | 5,829 | |
Issuance of common stock under the Equity Incentive Plan | Issuance of common stock under the Equity Incentive Plan | 117,276 | | | — | | | 5,577 | | | 5,577 | | Issuance of common stock under the Equity Incentive Plan | 75,169 | | | 0 | | | 5,341 | | | 5,341 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (23,823) | | | — | | | (2,484) | | | (2,484) | | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (8,114) | | | — | | | (1,297) | | | (1,297) | |
| Purchase of treasury stock | | Purchase of treasury stock | | (70,346) | | | (70,346) | |
Retirement of treasury stock | | Retirement of treasury stock | (515,000) | | | (1) | | | (70,345) | | | 70,346 | | | 0 | |
Other comprehensive income | Other comprehensive income | | 2,350 | | | 2,350 | | Other comprehensive income | | 2,177 | | | 2,177 | |
Net income | Net income | | 359 | | | 359 | | Net income | | 18,815 | | | 18,815 | |
Balance at June 30, 2020 | 60,152,187 | | | $ | 60 | | | $ | 885,373 | | | $ | — | | | $ | (91,759) | | | $ | 404,601 | | | $ | 1,198,275 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 60,278,756 | | | $ | 60 | | | $ | 868,289 | | | $ | 0 | | | $ | (23,654) | | | $ | 426,449 | | | $ | 1,271,144 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2019 | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | | | | | | |
Balance at April 1, 2019 | 57,773,679 | | | $ | 58 | | | $ | 660,032 | | | $ | — | | | $ | (58,244) | | | $ | 235,166 | | | $ | 837,012 | |
Stock-based compensation expense | | | | | 4,512 | | | | | | | | | 4,512 | |
Issuance of common stock under the Equity Incentive Plan | 150,367 | | | — | | | 6,001 | | | | | | | | | 6,001 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (20,644) | | | — | | | (2,761) | | | | | | | | | (2,761) | |
Purchase of treasury stock | | | | | | | (630) | | | | | | | (630) | |
Retirement of treasury stock | (4,500) | | | — | | | (630) | | | 630 | | | | | | | — | |
Other comprehensive loss | | | | | | | | | (15,099) | | | | | (15,099) | |
Net income | | | | | | | | | | | 49,327 | | | 49,327 | |
Balance at June 30, 2019 | 57,898,902 | | | $ | 58 | | | $ | 667,154 | | | $ | — | | | $ | (73,343) | | | $ | 284,493 | | | $ | 878,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | |
| | | | | | | | | | | | | |
| (In thousands, except share data) |
Balance at April 1, 2020 | 57,920,154 | | | $ | 58 | | | $ | 627,337 | | | $ | 0 | | | $ | (94,109) | | | $ | 404,242 | | | $ | 937,528 | |
Issuance of common stock | 2,138,580 | | | 2 | | | 249,788 | | | | | | | | | 249,790 | |
Stock-based compensation expense | | | | | 5,155 | | | | | | | | | 5,155 | |
Issuance of common stock under the Equity Incentive Plan | 117,276 | | | 0 | | | 5,577 | | | | | | | | | 5,577 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (23,823) | | | — | | | (2,484) | | | | | | | | | (2,484) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | 2,350 | | | | | 2,350 | |
Net income | | | | | | | | | | | 359 | | | 359 | |
Balance at June 30, 2020 | 60,152,187 | | | $ | 60 | | | $ | 885,373 | | | $ | 0 | | | $ | (91,759) | | | $ | 404,601 | | | $ | 1,198,275 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
| | | Six months ended June 30, 2020 | | | Six months ended June 30, 2021 |
| | Common Stock | | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
Balance at January 1, 2020 | 57,884,020 | | | $ | 58 | | | $ | 648,031 | | | $ | — | | | $ | (50,331) | | | $ | 373,510 | | | $ | 971,268 | | |
Issuance of common stock | 2,138,580 | | | 2 | | | 249,788 | | | | | | | | | 249,790 | | |
| | | | (In thousands, except share data) |
Balance at January 1, 2021 | | Balance at January 1, 2021 | 60,466,168 | | | $ | 60 | | | $ | 910,304 | | | $ | 0 | | | $ | (27,069) | | | $ | 400,502 | | | $ | 1,283,797 | |
| Stock-based compensation expense | Stock-based compensation expense | | 9,438 | | | 9,438 | | Stock-based compensation expense | | 11,135 | | | 11,135 | |
Issuance of common stock under the Equity Incentive Plan | Issuance of common stock under the Equity Incentive Plan | 416,152 | | | 1 | | | 18,038 | | | 18,039 | | Issuance of common stock under the Equity Incentive Plan | 371,561 | | | 1 | | | 24,337 | | | 24,338 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (55,252) | | | — | | | (7,715) | | | (7,715) | | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (43,973) | | | — | | | (7,142) | | | (7,142) | |
Purchase of treasury stock | Purchase of treasury stock | | (32,208) | | | (32,208) | | Purchase of treasury stock | | (70,346) | | | (70,346) | |
Retirement of treasury stock | Retirement of treasury stock | (231,313) | | | (1) | | | (32,207) | | | 32,208 | | | — | | Retirement of treasury stock | (515,000) | | | (1) | | | (70,345) | | | 70,346 | | | 0 | |
Other comprehensive loss | | (41,428) | | | (41,428) | | |
Other comprehensive income | | Other comprehensive income | | 3,415 | | | 3,415 | |
Net income | Net income | | 31,091 | | | 31,091 | | Net income | | 25,947 | | | 25,947 | |
Balance at June 30, 2020 | 60,152,187 | | | $ | 60 | | | $ | 885,373 | | | $ | — | | | $ | (91,759) | | | $ | 404,601 | | | $ | 1,198,275 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | 60,278,756 | | | $ | 60 | | | $ | 868,289 | | | $ | 0 | | | $ | (23,654) | | | $ | 426,449 | | | $ | 1,271,144 | |
| | | Six months ended June 30, 2019 | | | Six months ended June 30, 2020 |
| | Common Stock | | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity | | Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
Balance at January 1, 2019 | 57,494,468 | | | $ | 57 | | | $ | 648,651 | | | $ | — | | | $ | (62,355) | | | $ | 193,124 | | | $ | 779,477 | | |
| | | | (In thousands, except share data) |
Balance at January 1, 2020 | | Balance at January 1, 2020 | 57,884,020 | | | $ | 58 | | | $ | 648,031 | | | $ | 0 | | | $ | (50,331) | | | $ | 373,510 | | | $ | 971,268 | |
Issuance of common stock | | Issuance of common stock | 2,138,580 | | | 2 | | | 249,788 | | | 249,790 | |
Stock-based compensation expense | Stock-based compensation expense | | | | | 7,618 | | | | | | | | | 7,618 | | Stock-based compensation expense | | 9,438 | | | 9,438 | |
Issuance of common stock under the Equity Incentive Plan | Issuance of common stock under the Equity Incentive Plan | 454,296 | | | 1 | | | 17,055 | | | 17,056 | | Issuance of common stock under the Equity Incentive Plan | 416,152 | | | 1 | | | 18,038 | | | 18,039 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (45,362) | | | — | | | (5,540) | | | (5,540) | | Shares received in net share settlement of stock option exercises and vesting of restricted stock | (55,252) | | | — | | | (7,715) | | | (7,715) | |
Purchase of treasury stock | Purchase of treasury stock | | (630) | | | (630) | | Purchase of treasury stock | | (32,208) | | | (32,208) | |
Retirement of treasury stock | Retirement of treasury stock | (4,500) | | | — | | | (630) | | | 630 | | | — | | Retirement of treasury stock | (231,313) | | | (1) | | | (32,207) | | | 32,208 | | | 0 | |
Other comprehensive loss | Other comprehensive loss | | (10,988) | | | (10,988) | | Other comprehensive loss | | (41,428) | | | (41,428) | |
Net income | Net income | | 91,369 | | | 91,369 | | Net income | | 31,091 | | | 31,091 | |
Balance at June 30, 2019 | 57,898,902 | | | $ | 58 | | | $ | 667,154 | | | $ | — | | | $ | (73,343) | | | $ | 284,493 | | | $ | 878,362 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 60,152,187 | | | $ | 60 | | | $ | 885,373 | | | $ | 0 | | | $ | (91,759) | | | $ | 404,601 | | | $ | 1,198,275 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | Six months ended June 30, |
| | | | | | | | | | | | 2021 | | 2020 |
| | Six months ended June 30, | | | | | |
| | 2020 | | 2019 | | (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | |
Net income | Net income | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 25,947 | | | $ | 31,091 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 55,880 | | | 53,347 | | Depreciation and amortization | 55,392 | | | 55,880 | |
Impairment losses on long-lived assets | Impairment losses on long-lived assets | 16,857 | | | — | | Impairment losses on long-lived assets | 0 | | | 16,857 | |
Impairment losses on equity investment | Impairment losses on equity investment | 2,128 | | | — | | Impairment losses on equity investment | 0 | | | 2,128 | |
Stock-based compensation expense | Stock-based compensation expense | 9,438 | | | 7,618 | | Stock-based compensation expense | 11,135 | | | 9,438 | |
Deferred income taxes | Deferred income taxes | (2,783) | | | 3,641 | | Deferred income taxes | 2,238 | | | (2,783) | |
Other non-cash adjustments — net | Other non-cash adjustments — net | (1,187) | | | (294) | | Other non-cash adjustments — net | 513 | | | (1,187) | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (73,449) | | | 21,375 | | Accounts receivable | 35,338 | | | (73,449) | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | (33,156) | | | (3,380) | | Prepaid expenses and other current assets | (10,612) | | | (33,156) | |
Accounts payable and accrued expenses | Accounts payable and accrued expenses | (19,824) | | | 1,231 | | Accounts payable and accrued expenses | (1,818) | | | (19,824) | |
Income taxes | Income taxes | 327 | | | (8,065) | | Income taxes | (19,908) | | | 327 | |
Deferred revenue | Deferred revenue | 3,399 | | | 13,014 | | Deferred revenue | 28,117 | | | 3,399 | |
Leases | Leases | 30,003 | | | 9,891 | | Leases | (2,143) | | | 30,003 | |
Other assets | Other assets | 3,404 | | | (1,371) | | Other assets | 3,101 | | | 3,404 | |
Other current and long-term liabilities | Other current and long-term liabilities | 29,132 | | | 2,235 | | Other current and long-term liabilities | 8,425 | | | 29,132 | |
Net cash provided by operating activities | Net cash provided by operating activities | 51,260 | | | 190,611 | | Net cash provided by operating activities | 135,725 | | | 51,260 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
Purchases of fixed assets | Purchases of fixed assets | (32,374) | | | (48,151) | | Purchases of fixed assets | (33,953) | | | (32,374) | |
Proceeds from the disposal of fixed assets | Proceeds from the disposal of fixed assets | 7,352 | | | 3,136 | | Proceeds from the disposal of fixed assets | 5,490 | | | 7,352 | |
Proceeds from the maturity of debt securities and sale of other investments | Proceeds from the maturity of debt securities and sale of other investments | 7,247 | | | — | | Proceeds from the maturity of debt securities and sale of other investments | 10,500 | | | 7,247 | |
Purchases of debt securities and other investments | Purchases of debt securities and other investments | (6,106) | | | (20,024) | | Purchases of debt securities and other investments | (10,611) | | | (6,106) | |
| Payments and settlements for acquisitions — net of cash acquired | Payments and settlements for acquisitions — net of cash acquired | (4,394) | | | (25,860) | | Payments and settlements for acquisitions — net of cash acquired | (9,082) | | | (4,394) | |
Net cash used in investing activities | Net cash used in investing activities | (28,275) | | | (90,899) | | Net cash used in investing activities | (37,656) | | | (28,275) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | CASH FLOWS FROM FINANCING ACTIVITIES: | |
Proceeds from stock issuance — net of issuance costs | Proceeds from stock issuance — net of issuance costs | 249,937 | | | — | | Proceeds from stock issuance — net of issuance costs | 0 | | | 249,937 | |
Borrowings under revolving credit facility | Borrowings under revolving credit facility | 43,200 | | | 158,374 | | Borrowings under revolving credit facility | 0 | | | 43,200 | |
Payments under revolving credit facility | Payments under revolving credit facility | (43,200) | | | (276,232) | | Payments under revolving credit facility | 0 | | | (43,200) | |
Principal payments of long-term debt | Principal payments of long-term debt | (5,375) | | | (5,375) | | Principal payments of long-term debt | (5,375) | | | (5,375) | |
Payments for debt issuance costs | (2,818) | | | — | | |
Payments of debt issuance costs | | Payments of debt issuance costs | (2,057) | | | (2,818) | |
Purchase of treasury stock | Purchase of treasury stock | (32,658) | | | (690) | | Purchase of treasury stock | (70,346) | | | (32,658) | |
Proceeds from issuance of common stock upon exercise of options and restricted stock upon purchase | | Proceeds from issuance of common stock upon exercise of options and restricted stock upon purchase | 28,180 | | | 21,187 | |
Taxes paid related to the net share settlement of stock options and restricted stock | Taxes paid related to the net share settlement of stock options and restricted stock | (7,715) | | | (5,540) | | Taxes paid related to the net share settlement of stock options and restricted stock | (7,142) | | | (7,715) | |
Proceeds from issuance of common stock upon exercise of options and restricted stock upon purchase | 21,187 | | | 17,085 | | |
| Payments of contingent consideration for acquisitions | Payments of contingent consideration for acquisitions | (1,088) | | | — | | Payments of contingent consideration for acquisitions | 0 | | | (1,088) | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 221,470 | | | (112,378) | | Net cash provided by (used in) financing activities | (56,740) | | | 221,470 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | Effect of exchange rates on cash, cash equivalents and restricted cash | (908) | | | 414 | | Effect of exchange rates on cash, cash equivalents and restricted cash | (675) | | | (908) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 243,547 | | | (12,252) | | |
Net increase in cash, cash equivalents and restricted cash | | Net increase in cash, cash equivalents and restricted cash | 40,654 | | | 243,547 | |
Cash, cash equivalents and restricted cash — beginning of period | Cash, cash equivalents and restricted cash — beginning of period | 31,192 | | | 38,478 | | Cash, cash equivalents and restricted cash — beginning of period | 388,465 | | | 31,192 | |
Cash, cash equivalents and restricted cash — end of period | Cash, cash equivalents and restricted cash — end of period | $ | 274,739 | | | $ | 26,226 | | Cash, cash equivalents and restricted cash — end of period | $ | 429,119 | | | $ | 274,739 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)
| | | | Six months ended June 30, |
| | | | | | | | | | | | 2021 | | 2020 |
| | Six months ended June 30, | | | | | |
| | 2020 | | 2019 | | (In thousands) |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | | | | RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 270,442 | | | $ | 22,656 | | Cash and cash equivalents | $ | 418,638 | | | $ | 270,442 | |
Restricted cash and cash equivalents, included in prepaid expenses and other current assets | Restricted cash and cash equivalents, included in prepaid expenses and other current assets | 4,297 | | | 3,570 | | Restricted cash and cash equivalents, included in prepaid expenses and other current assets | 10,481 | | | 4,297 | |
| Total cash, cash equivalents and restricted cash — end of period | Total cash, cash equivalents and restricted cash — end of period | $ | 274,739 | | | $ | 26,226 | | Total cash, cash equivalents and restricted cash — end of period | $ | 429,119 | | | $ | 274,739 | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | SUPPLEMENTAL CASH FLOW INFORMATION: | | SUPPLEMENTAL CASH FLOW INFORMATION: | |
Cash payments of interest | Cash payments of interest | $ | 18,117 | | | $ | 22,336 | | Cash payments of interest | $ | 16,815 | | | $ | 18,117 | |
Cash payments of income taxes | Cash payments of income taxes | $ | 6,709 | | | $ | 27,236 | | Cash payments of income taxes | $ | 21,200 | | | $ | 6,709 | |
Cash paid for amounts included in the measurement of lease liabilities | Cash paid for amounts included in the measurement of lease liabilities | $ | 51,397 | | | $ | 60,807 | | Cash paid for amounts included in the measurement of lease liabilities | $ | 72,496 | | | $ | 51,397 | |
| NON-CASH TRANSACTIONS: | NON-CASH TRANSACTIONS: | | NON-CASH TRANSACTIONS: | |
Fixed asset purchases recorded in accounts payable and accrued expenses | Fixed asset purchases recorded in accounts payable and accrued expenses | $ | 3,311 | | | $ | 4,185 | | Fixed asset purchases recorded in accounts payable and accrued expenses | $ | 2,849 | | | $ | 3,311 | |
Contingent consideration issued for acquisitions | Contingent consideration issued for acquisitions | $ | — | | | $ | 16,375 | | Contingent consideration issued for acquisitions | $ | 7,337 | | | $ | 0 | |
| Operating right-of-use assets obtained in exchange for operating lease liabilities — net | Operating right-of-use assets obtained in exchange for operating lease liabilities — net | $ | 71,677 | | | $ | 39,954 | | Operating right-of-use assets obtained in exchange for operating lease liabilities — net | $ | 28,147 | | | $ | 71,677 | |
Restricted stock reclassified from other current liabilities to equity upon vesting | | Restricted stock reclassified from other current liabilities to equity upon vesting | $ | 4,178 | | | $ | 4,424 | |
See accompanying notes to condensed consolidated financial statements.
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 center-based early education and child care, and early education, back-up child and adult/elder care, tuition assistance and student loan repayment program administration, educational advisory services, and other support services for employers and families in the United States, the United Kingdom, the Netherlands, Puerto Rico Canada, and India. The Company provides services designed to help families, employers and their employees better integrate work and family life, primarily under multi-year contracts with employers who offer early education and child care, dependentfamily care solutions, and workforce education services, as part of their employee benefits packages in an effort to support employees across life and career stages and improve employee engagement.
Basis of Presentation — The accompanying unaudited condensed consolidated balance sheet as of June 30, 20202021 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended June 30, 20202021 and 20192020 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required in accordance with U.S. GAAP 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, 2019.2020. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts within the operating section of the condensed consolidated balance sheet and supplemental statement of cash flows information to conform to the current period presentation.
In the opinion of the Company’s management, the Company’s unaudited condensed consolidated balance sheet as of June 30, 20202021 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended June 30, 20202021 and 2019,2020, 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.
Stockholders’ Equity — The board of directors of the Company authorized a share repurchase program of up to $300 million of the Company’s outstanding common stock, effective June 12, 2018. The share repurchase program has no expiration date. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions, under Rule 10b5-1 plans, or by other means in accordance with federal securities laws. AtDuring the three months ended June 30, 2020, $194.92021, 0.5 million shares were repurchased for $70.3 million under this authorization, and at June 30, 2021, $124.5 million remained available under the repurchase program. The Company has temporarily suspended share repurchases due to the impact of COVID-19 as the Company prioritizes investments to the most critical operating areas.
On April 21, 2020, the Company completed the issuance and sale of 2,138,580 shares of common stock, par value $0.001 per share, to Durable Capital Master Fund LP at a price of $116.90 per share. The Company subsequently filed a registration statement to register the resale of these shares in accordance with the terms of the purchase agreement. The Company received net proceeds from the offering of $249.8 million.
COVID-19 Pandemic — InSince March 2020, the Company began to experience the impact ofCompany's global operations have been significantly impacted by the COVID-19 pandemic on its global operations, as required business and school closures and shelter-in-place government mandates resulted in the temporary closure of a significant portion of the Company’s child care centers. The Company has continued to operate critical health care client and “hub” centers to provide care and support services to the children and families of first responders, scientists, health care and medical professionals, and other essential workers, as well as the many support industries facilitating their work. As countries and local jurisdictions have begun to lift certain restrictions and re-open, the Company commenced a phased re-opening of its temporarily closed centers.pandemic. As of June 30, 2020,2021, the Company managed the operations of 1,076operated 1,006 early education and child care andcenters, of which approximately 920 early education centers with the capacity to serve approximately 120,000 children and their families. As of June 30, 2020, over 400 of its child care centers were operating, including approximately 210 centers in the United States, 135 centers in the United Kingdom, and 61 centers in the Netherlands, with a total capacity to serve approximately 50,000 children.open. The Company plans to continue this phased re-opening throughremains focused on the third and fourth quarters of 2020, and potentially in subsequent periods, as conditions permit. Open centers are operating with specific COVID-19 protocols in place in order to protect the health and safety of children, families and staff, including social distancing procedures for pick-up and drop-off, daily health checks, the use of face masks by the Company’s staff, limited group sizes, and enhanced hygiene and cleaning practices. The Company’s back-up care and educational advisory services have remained fully operational and available to clients. Due to the acute need for child care support, the Company expanded back-up care services and the availability of self-sourced reimbursed care.
As a result of the economic effects of the COVID-19 pandemic, including the Company’s temporary closure of a significant portionre-enrollment of its centers and the related negative financial impact to its resultsphased re-opening of operations,the limited number of centers that remain temporarily closed, which the Company considered whether these conditions indicated it was more likely than not that the Company’s $1.4 billion in goodwillexpects will continue throughout 2021. The broad and $180.6 million in indefinite-lived intangible assets were impaired. Based on the facts and circumstances as of June 30, 2020, the Company determined it was more likely than not that the fair value of its reporting units and indefinite-lived intangible assets exceeded their carrying amount and, therefore, interim impairment analysis was not required.
In addition, the Company reviewed its long-lived assets, including operating lease right-of-use assets and amortizable intangible assets, to determine whether these conditions indicated that the carrying amount of such assets may not be recoverable. During the six months ended June 30, 2020, the Company recognized a $16.9 million impairment loss on long-lived assets for certain centers that are unlikely to recover the carrying amount of their long-lived assets due to the operational disruption caused by the pandemic, including certain locations that the Company has decided to not re-open or expects not to continue operating on a long-term basis. Given the current risks and uncertainties associated with the COVID-19 pandemic, additional impairment losses may occur.
The broad effects of COVID-19, its duration and the scope of the ongoing disruption, including the pace of re-opening the Company’s remaining temporarily closed centers and re-ramping of enrollment at centers that have re-opened,related disruptions, cannot be predicted and is affected by many interdependent variables and decisions by government authorities as well as the Company’s client partners. The timing and cadence of re-opening the remaining temporarily closed centers will vary by jurisdiction and will be guided by factors such as government requirements, parent and client demand, as well as guidance and directives from medical experts and the Centers for Disease Control and Prevention (“CDC”). Therefore, although the Company currently anticipates that a significant majority of its centers will re-open by September 30, 2020, the timing and cadence of re-opening the remaining temporarily closed centers may change as we continue to evaluate local conditions and factors governing opening decisions, including federal and state guidelines. The Company cannot anticipate how long it will take for re-opened centers to reach typical enrollment levels and there is no assurance that centers currently open will continue to operate. Additionally, as the Company continues to analyze the current environment, it may decide to not re-open certain centers in locations where demand and economic trends have shifted. While the Company has experienced increased demand for back-up care services, such as in-home care and self-sourced reimbursed care, and minimal disruption to providing educational advisory services, these conditions and trends may not continue in subsequent periods. As businesses and families adapt to new conditions in the coming months, the Company expects its back-up care services to return to primarily in-center and in-home service delivery at more normalized levels going forward.predicted. Given these factors, the Company currently expects the effects of COVID-19 to continue to adversely impact the results of its operations for the remainder of 2020, and potentially in subsequent periods.
In response to these developments, the Company has implemented measures in an effort to manage costs and improve liquidity and access to financial resources, and thereby mitigate the impact on the Company’s financial position and operations. These measures include, but are not limited to, the following:
•furloughing a significant portion of the Company’s employees in proportion to the number of center closures, including center personnel for temporarily closed centers and related support functions in the Company’s corporate offices;
•reducing discretionary spending and overhead costs, while prioritizing investments that support current operations and deferring to future periods nonessential and discretionary investments;
•temporary voluntary reductions in compensation to certain executive officers and board members;
•participating in government assistance programs, including tax deferrals, tax credits and employee wage support;
•renegotiating payment terms with vendors and landlords;
•temporary suspension of share repurchases;
•amending the Company’s credit agreement in April 2020 and May 2020 to increase the borrowing capacity of its revolving credit facility from $225 million to $400 million; and
•raising $249.8 million in net proceeds from the issuance and sale of common stock in April 2020.
In light of these actions and based on the Company’s assumptions about the continued impact of COVID-19 on its operations, the Company believes it has sufficient liquidity to satisfy its obligations for at least the next twelve months. Refer to Note 6, Credit Arrangements and Debt Obligations, for additional information on the amendments to the Company’s credit agreement.2021.
Government AssistanceSupport — The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) wasand the Consolidated Appropriations Act, 2021 (“CAA”) were enacted in the United States on March 27, 2020 in the United States, which is anand January 1, 2021, respectively; both are economic aid packagepackages to help mitigate the impact of the pandemic and includes several relief provisions related to payroll and income taxes.pandemic. Additionally, other foreign governmental legislation that providesprovided relief provisions has beenwas enacted in response to the economic impact of COVID-19. The Company has participated in certain of these government assistancesupport programs, including availing itself toof certain tax deferrals and tax credits allowed pursuant to the CARES Act in the United States, andas well as certain tax deferrals, tax credits, and employee wage support in the United Kingdom, and may continue to do soKingdom. On December 27, 2020, the employee retention tax credit, originally enacted under the CARES Act in the future.United States, was expanded and extended under the CAA to wages paid through the first two quarters of 2021, among other changes. Governmental assistance in connection to certain tax credits and employee wage support received is recorded on the consolidated statement of income as a reduction to the related expenseexpenses that the assistance is intended to defray. During the six months ended June 30, 2021 and 2020, $17.0 million and $39.6 million, respectively, was recorded as a reduction to labor costs, primarily in cost of services which consists of $10.3 million of payroll tax credits in the United States and $29.3 million of employee wage support in the United Kingdom.relation to these benefits. As of June 30, 2021 and December 31, 2020, $19.2$10.9 million and $8.4 million, respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government assistance programs in relation to these benefits.support programs. Additionally, approximately $6.6the Company had payroll tax deferrals totaling $20.4 million as of June 30, 2021 and $6.7December 31, 2020, of which $10.2 million was recorded in accounts payable and accrued expenses and $10.2 million was included in other long-term liabilities, respectively, related to payroll tax deferrals.liabilities.
Recently Adopted Pronouncements — On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the existing guidance on the accounting for credit losses of certain financial instruments. This guidance requires entities to recognize the expected credit loss over the lifetime of certain financial instruments and modifies the impairment model for available-for-sale debt securities. This standard is applied by recording a cumulative effect adjustment to retained earnings upon adoption. There was no impact to the Company’s consolidated financial statements upon the adoption of this guidance.
The Company generates accounts receivable from fees charged to parents and employer sponsors, which are generally billed monthly as services are rendered or in advance, and are classified as short-term. The Company monitors collections and maintains a provision for expected credit losses based on historical trends, current conditions, and relevant forecasted information, in addition to provisions established for specific collection issues that have been identified. During the three months ended June 30, 2020, the Company experienced a significant increase in the demand for its back-up care services, which resulted in a corresponding increase in accounts receivable and the allowance for credit losses. Additionally, the Company changed its estimate of credit losses as the economic environment deteriorated. Activity in the allowance for credit losses is as follows (in thousands):
| | | | | |
| Six months ended June 30, 2020 |
Beginning balance at January 1, 2020 | $ | 1,226 | |
Provision | 7,641 | |
Write-offs and recoveries | (516) | |
Ending balance at June 30, 2020 | $ | 8,351 | |
The Company’s investments in debt securities, which were classified as available-for-sale, are further disclosed in Note 9, Fair Value Measurements. As of June 30, 2020, the available-for-sale debt securities are not in an unrealized loss position, and therefore there is no allowance for credit losses.
Recently Issued PronouncementsPronouncement — In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The standard removes certain exceptions to the general principles in Topic 740 and improves the consistent application of U.S. GAAP by clarifying and amending certain areas of the existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company is inadopted the process of evaluating the impact ofnew guidance on January 1, 2021. The adoption of this standard but doesdid not expect it will have a material impact on the Company’s consolidated financial statements and related disclosures.
2. REVENUE RECOGNITION
The Company's services are comprised of full service center-based child care, back-up care, and educational advisory services. The Company's back-up care offerings include self-sourced reimbursed care, a reimbursement program for clients to utilize in emergency-type situations. Revenue growth in the back-up care segment for the three months ended June 30, 2020 was primarily attributable to the increased utilization for self-sourced reimbursed care as a result of the acute need for child care during the temporary closure of schools and child care centers. Revenue for self-sourced care is comprised of variable transaction fees paid by employer sponsors and is recognized on a net basis over time as services are provided.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into segments and geographical regions. Revenue disaggregated by segment and geographical region was as follows (in thousands):follows:
| | | | Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | (In thousands) |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | |
North America | | North America | $ | 216,327 | | | $ | 76,660 | | | $ | 25,567 | | | $ | 318,554 | |
Europe | | Europe | 118,100 | | | 4,824 | | | 0 | | | 122,924 | |
| | Full service center-based child care | | Back-up care | | Educational advisory services | | Total | | $ | 334,427 | | | $ | 81,484 | | | $ | 25,567 | | | $ | 441,478 | |
Three months ended June 30, 2020 | Three months ended June 30, 2020 | | | | | | | | Three months ended June 30, 2020 | | | | | | | |
North America | North America | $ | 92,572 | | | $ | 133,106 | | | $ | 20,562 | | | $ | 246,240 | | North America | $ | 92,572 | | | $ | 133,106 | | | $ | 20,562 | | | $ | 246,240 | |
Europe | Europe | 44,734 | | | 2,798 | | | — | | | 47,532 | | Europe | 44,734 | | | 2,798 | | | 0 | | | 47,532 | |
| | $ | 137,306 | | | $ | 135,904 | | | $ | 20,562 | | | $ | 293,772 | | | $ | 137,306 | | | $ | 135,904 | | | $ | 20,562 | | | $ | 293,772 | |
Three months ended June 30, 2019 | | | | | | | | |
North America | $ | 317,031 | | | $ | 65,903 | | | $ | 19,431 | | | $ | 402,365 | | |
Europe | 121,549 | | | 4,146 | | | — | | | 125,695 | | |
| $ | 438,580 | | | $ | 70,049 | | | $ | 19,431 | | | $ | 528,060 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | | | | |
| (In thousands) |
Six months ended June 30, 2021 | | | | | | | |
North America | $ | 408,781 | | | $ | 147,842 | | | $ | 49,733 | | | $ | 606,356 | |
Europe | 215,965 | | | 9,997 | | | 0 | | | 225,962 | |
| $ | 624,746 | | | $ | 157,839 | | | $ | 49,733 | | | $ | 832,318 | |
Six months ended June 30, 2020 | | | | | | | |
North America | $ | 390,639 | | | $ | 203,663 | | | $ | 41,327 | | | $ | 635,629 | |
Europe | 158,058 | | | 6,408 | | | 0 | | | 164,466 | |
| $ | 548,697 | | | $ | 210,071 | | | $ | 41,327 | | | $ | 800,095 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Full service center-based child care | | Back-up care | | Educational advisory services | | Total |
Six months ended June 30, 2020 | | | | | | | |
North America | $ | 390,639 | | | $ | 203,663 | | | $ | 41,327 | | | $ | 635,629 | |
Europe | 158,058 | | | 6,408 | | | — | | | 164,466 | |
| $ | 548,697 | | | $ | 210,071 | | | $ | 41,327 | | | $ | 800,095 | |
Six months ended June 30, 2019 | | | | | | | |
North America | $ | 621,343 | | | $ | 127,910 | | | $ | 38,175 | | | $ | 787,428 | |
Europe | 235,557 | | | 6,833 | | | — | | | 242,390 | |
| $ | 856,900 | | | $ | 134,743 | | | $ | 38,175 | | | $ | 1,029,818 | |
The classification “North America” is comprised of the Company’s United States, Canada,Puerto Rico, and Puerto RicoCanada operations and the classification “Europe” includes the United Kingdom, Netherlands, and India operations. During the third quarter of fiscal 2020, the Company divested its child care center business in Canada and ceased to operate its 2 centers in that geography.
Deferred Revenue
The Company records deferred revenue when payments are received in advance of the Company’s performance under the contract, which is recognized as revenue as the performance obligation is satisfied. During the six months ended June 30, 2021, $146.7 million was recognized as revenue related to the deferred revenue balance recorded at December 31, 2020. During the six months ended June 30, 2020, $151.4 million was recognized as revenue related to the deferred revenue balance recorded at December 31, 2019. During the six months ended June 30, 2019, $138.7 million was recognized as revenue related to the deferred revenue balance recorded at December 31, 2018.
Remaining Performance Obligations
The transaction price allocated to the remaining performance obligations relates to services that are paid or invoiced in advance. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original contract term of one year or less, or for variable consideration allocated to the unsatisfied performance obligation of a series of services. The transaction price allocated to the remaining performance obligations relates to services that are paid or invoiced in advance. The Company’s remaining performance obligations not subject to the practical expedients were not material.
3. LEASES
The Company has operating leases for certain of its full service and back-up early education and child care and early education centers, corporate offices, call centers, and to a lesser extent, various office equipment, in the United States, the United Kingdom, and the Netherlands, and Canada.Netherlands. Most of the leases expire within 10 to 15 years and many contain renewal options and/or termination provisions. The Company does not have any finance leases as of June 30, 2020.2021.
Lease Expense
The components of lease expense were as follows (in thousands):follows:
| | | | Three months ended June 30, | | Six months ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2021 | | 2020 |
| | Three months ended June 30, | | | Six months ended June 30, | | | | | | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | | (In thousands) |
Operating lease expense (1) | Operating lease expense (1) | $ | 38,667 | | | $ | 30,429 | | | $ | 72,528 | | | $ | 61,389 | | | Operating lease expense (1) | $ | 33,652 | | | $ | 38,667 | | | $ | 67,277 | | | $ | 72,528 | |
Variable lease expense (1) | Variable lease expense (1) | 6,120 | | | 8,653 | | | 15,353 | | | 16,986 | | | Variable lease expense (1) | 6,735 | | | 6,120 | | | 13,677 | | | 15,353 | |
Total lease expense | Total lease expense | $ | 44,787 | | | $ | 39,082 | | | $ | 87,881 | | | $ | 78,375 | | | Total lease expense | $ | 40,387 | | | $ | 44,787 | | | $ | 80,954 | | | $ | 87,881 | |
(1) Excludes short-term lease expense and sublease income, which were immaterial for the periods presented.
Operating lease expense for the three and six months ended June 30, 2020 includes an impairment loss on operating lease right-of-use assets of $5.2 million. Refer to Note 9, Fair Value Measurements, for additional information.
Other Information
The weighted average remaining lease term and the weighted average discount rate were as follows:
| | | | | | | | | | | | | June 30, 2021 | | December 31, 2020 |
| | June 30, 2020 | | December 31, 2019 | | | | |
Weighted average remaining lease term (in years) | Weighted average remaining lease term (in years) | 10 | | 10 | Weighted average remaining lease term (in years) | 10 | | 10 |
Weighted average discount rate | Weighted average discount rate | 6.1% | | 6.2% | Weighted average discount rate | 5.9% | | 6.0% |
Maturity of Lease Liabilities
The following table summarizes the maturity of lease liabilities as of June 30, 2020 (in thousands):2021:
| | | Operating Leases | | Operating Leases |
Remainder of 2020 | $ | 63,157 | | |
2021 | 131,457 | | |
| | | | (In thousands) |
Remainder of 2021 | | Remainder of 2021 | $ | 55,582 | |
2022 | 2022 | 122,511 | | 2022 | 133,656 | |
2023 | 2023 | 114,224 | | 2023 | 125,251 | |
2024 | 2024 | 103,860 | | 2024 | 114,428 | |
2025 | | 2025 | 99,967 | |
Thereafter | Thereafter | 573,179 | | Thereafter | 540,141 | |
Total lease payments | Total lease payments | 1,108,388 | | Total lease payments | 1,069,025 | |
Less imputed interest | Less imputed interest | (291,556) | | Less imputed interest | (268,692) | |
Present value of lease liabilities | Present value of lease liabilities | 816,832 | | Present value of lease liabilities | 800,333 | |
Less current portion of operating lease liabilities | Less current portion of operating lease liabilities | (92,457) | | Less current portion of operating lease liabilities | (87,934) | |
Long-term operating lease liabilities | Long-term operating lease liabilities | $ | 724,375 | | Long-term operating lease liabilities | $ | 712,399 | |
As of June 30, 2020,2021, the Company had entered into additional operating leases that have not yet commenced with total fixed payment obligations of $42.4$21.8 million. The leases are expected to commence between the third quarter of fiscal 20202021 and the fourth quarter of fiscal 20212022 and have initial lease terms of approximately 10 to 15 years.
Lease Modifications
In response to the broad effects of COVID-19, the Company re-negotiated certain payment terms with lessors to mitigate the impact on the Company’s financial position and operations. As of June 30, 2020,2021, the Company had deferred lease payments of $11.7$2.0 million. The majority of these lease payments are payable over the next 1.5 years. On April 10,year. As of December 31, 2020, the FASB issued guidance forCompany had deferred lease concessions provided to lessees in response to the effectspayments of COVID-19. Such guidance allows lessees to make an election not to evaluate whether a lease concession provided by a lessor should be accounted for as a lease modification, in the event the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Such concessions would be recorded as negative lease expense in the period of relief. The Company elected this practical expedient in accounting for lease concessions provided for our center lease agreements and the impact was immaterial.$7.7 million.
4. ACQUISITIONS
The Company’s growth strategy includes expansion through strategic and synergistic acquisitions. The goodwill resulting from these acquisitions arises largely from synergies expected from combining the operations of the businesses acquired with ourthe Company's existing operations, including cost efficiencies and leveraging existing client relationships, as well as from benefits derived from gaining the related assembled workforce.
20202021 Acquisitions
During the six months ended June 30, 2020,2021, the Company acquired 2 centers as well as a camp and back-up care provider in the United States, in 2 separate business acquisitions, which were each accounted for as 2 separatea business combinations. The centerscombination. These businesses were acquired for aggregate cash consideration of $4.3$8.6 million, net of cash acquired of $0.3 million, and consideration payable of $0.1 million,$0.4 million. Additionally, the Company is subject to contingent consideration payments for these 2 acquisitions, and includes fixed assetsrecorded a preliminary fair value estimate of $2.3$7.3 million in relation to these contingent consideration arrangements at acquisition. Contingent consideration of up to $1.2 million may be payable within one year if certain performance targets are met for one of the real estate acquired.acquisitions, and contingent consideration is payable in 2026 based on certain financial metrics for the other acquisition. The Company recorded goodwill of $2.1$14.5 million related to the back-up care segment and of $3.4 million related to the full service center-based child care segment, all of which will be deductible for tax purposes. In addition, the Company recorded intangible assets of $1.3 million that will be amortized over five years, as well as fixed assets of $1.5 million in relation to these acquisitions.
The determination and 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 June 30, 2020,2021, the purchase price allocations for these acquisitions remain open as the Company gathers additional information regarding the assets acquired and the liabilities assumed.assumed, and finalizes its determination of the estimated fair value of the contingent consideration at the date of acquisition. The operating results for the acquired businesses are included in the consolidated results of operations from the date of acquisition, and were not material to the Company’s financial results.
During the six months ended June 30, 2020, the Company paid $1.1 million for contingent consideration related to an acquisition completed in 2018, which had been recorded as a liability at the date
20192020 Acquisitions
During the year ended December 31, 2019,2020, the Company acquired 32 child care centers and the tuition program management division of another companySittercity business, an online marketplace for families and caregivers, in the United States, 4 centers in the Netherlands, and 1 back-up care provider in the United Kingdom, in 83 separate business acquisitions, which were each accounted for as a business combinations.combination. These businesses were acquired for cash consideration of $53.3$8.1 million, net of cash acquired of $1.2$1.3 million, and consideration payable of $0.1 million, and included fixed assets and technology of $4.1 million, as well as a trade name of $0.7 million. Additionally, contingent consideration of up to $20.0 million maythat will be payableamortized over the next three years if certain future performance targets are met. The Company recorded a fair value estimate of the contingent consideration of $13.9 million.five years. The Company recorded goodwill of $25.4 million related to the back-up care segment, which will not be deductible for tax purposes, $14.0$2.0 million related to the educational advisory and other services segment and $2.1 million related to the full-service center-based child care segment, all of which will be deductible for tax purposes, and $15.2 million related to the full service center-based child care segment, of which $3.9 million will be deductible for tax purposes. In addition, the Company recorded intangible assets of $14.6 million primarily consisting of customer relationships that will be amortized over five years, as well as fixed assets and technology of $3.1 million, and deferred tax liabilities of $1.9 million in relation to these acquisitions.
The determination and 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 June 30, 2020,2021, the purchase price allocationsallocation for 41 of the 20192020 acquisitions remainremains open as the Company gathers additional information regarding the assets acquired and the liabilities assumed.
During the year ended December 31, 2019,2020, the Company paid $4.2$1.2 million for deferred and contingent consideration related to acquisitions completed in 2018 and 2019, which were accruedhad been recorded as a liability at the date of acquisition. Of this settlement, $3.5 million was for deferred consideration payable related to an acquisition completed in 2018, and $0.7 million was the final installment for contingent consideration related to an acquisition completed in 2016.
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill were as follows (in thousands):follows:
| | | Full service center-based child care | | Back-up care | | Educational advisory services | | Total | | Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
Balance at January 1, 2019 | $ | 1,155,705 | | | $ | 168,105 | | | $ | 23,801 | | | $ | 1,347,611 | | |
| | | | (In thousands) |
| Balance at January 1, 2021 | | Balance at January 1, 2021 | $ | 1,197,658 | | | $ | 194,616 | | | $ | 39,693 | | | $ | 1,431,967 | |
Additions from acquisitions | Additions from acquisitions | 15,228 | | | 25,350 | | | 14,000 | | | 54,578 | | Additions from acquisitions | 3,435 | | | 14,537 | | | 0 | | | 17,972 | |
Adjustments to prior year acquisitions | Adjustments to prior year acquisitions | (83) | | | — | | | — | | | (83) | | Adjustments to prior year acquisitions | 0 | | | 0 | | | 150 | | | 150 | |
Effect of foreign currency translation | Effect of foreign currency translation | 10,380 | | | 387 | | | — | | | 10,767 | | Effect of foreign currency translation | 758 | | | 194 | | | 0 | | | 952 | |
Balance at December 31, 2019 | 1,181,230 | | | 193,842 | | | 37,801 | | | 1,412,873 | | |
Additions from acquisitions | 2,118 | | | — | | | — | | | 2,118 | | |
Adjustments to prior year acquisitions | (340) | | | — | | | (125) | | | (465) | | |
Effect of foreign currency translation | (21,135) | | | (1,741) | | | — | | | (22,876) | | |
Balance at June 30, 2020 | $ | 1,161,873 | | | $ | 192,101 | | | $ | 37,676 | | | $ | 1,391,650 | | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 1,201,851 | | | $ | 209,347 | | | $ | 39,843 | | | $ | 1,451,041 | |
The Company also has intangible assets, which consisted of the following at June 30, 20202021 and December 31, 2019 (in thousands):2020:
| | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets: | | | | | | | |
Customer relationships | 14 years | | $ | 402,243 | | | $ | (297,036) | | | $ | 105,207 | |
Trade names | 6 years | | 10,154 | | | (8,490) | | | 1,664 | |
| | | 412,397 | | | (305,526) | | | 106,871 | |
Indefinite-lived intangible assets: | | | | | | | |
Trade names | N/A | | 180,618 | | | — | | | 180,618 | |
| | | $ | 593,015 | | | $ | (305,526) | | | $ | 287,489 | |
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2019 | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets: | | | | | | | |
Customer relationships | 14 years | | $ | 404,667 | | | $ | (283,597) | | | $ | 121,070 | |
Trade names | 6 years | | 10,656 | | | (8,144) | | | 2,512 | |
| | | 415,323 | | | (291,741) | | | 123,582 | |
Indefinite-lived intangible assets: | | | | | | | |
Trade names | N/A | | 181,091 | | | — | | | 181,091 | |
| | | $ | 596,414 | | | $ | (291,741) | | | $ | 304,673 | |
The Company estimates that it will record amortization expense related to intangible assets existing as of June 30, 2020 as follows (in thousands):
| | | | | |
| Estimated amortization expense |
Remainder of 2020 | $ | 15,332 | |
2021 | $ | 28,083 | |
2022 | $ | 25,774 | |
2023 | $ | 24,905 | |
2024 | $ | 11,051 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
| | | | | | | | |
| | | | (In thousands) |
Definite-lived intangible assets: | | | | | | | | |
Customer relationships | | 14 years | | $ | 402,965 | | | $ | (325,348) | | | $ | 77,617 | |
Trade names | | 6 years | | 12,282 | | | (10,039) | | | 2,243 | |
| | | | 415,247 | | | (335,387) | | | 79,860 | |
Indefinite-lived intangible assets: | | | | | | | | |
Trade names | | N/A | | 181,153 | | | — | | | 181,153 | |
| | | | $ | 596,400 | | | $ | (335,387) | | | $ | 261,013 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
| | | | | | | | |
| | | | (In thousands) |
Definite-lived intangible assets: | | | | | | | | |
Customer relationships | | 14 years | | $ | 402,319 | | | $ | (310,587) | | | $ | 91,732 | |
Trade names | | 6 years | | 11,219 | | | (9,633) | | | 1,586 | |
| | | | 413,538 | | | (320,220) | | | 93,318 | |
Indefinite-lived intangible assets: | | | | | | | | |
Trade names | | N/A | | 181,302 | | | — | | | 181,302 | |
| | | | $ | 594,840 | | | $ | (320,220) | | | $ | 274,620 | |
6. CREDIT ARRANGEMENTS AND DEBT OBLIGATIONS
Senior Secured Credit Facilities
The Company’s senior secured credit facilities consist of a secured term loan facility (“term loan facility”) and a $400 million multi-currency revolving credit facility (“revolving credit facility”). The term loans matureloan matures on November 7, 2023 and requirerequires quarterly principal payments of $2.7 million, with the remaining principal balance due on November 7, 2023.
Outstanding term loan borrowings were as follows (in thousands):follows:
| | | June 30, 2020 | | December 31, 2019 | | June 30, 2021 | | December 31, 2020 |
Term loans | $ | 1,040,063 | | | $ | 1,045,438 | | |
| | | | (In thousands) |
Term loan | | Term loan | $ | 1,029,313 | | | $ | 1,034,688 | |
Deferred financing costs and original issue discount | Deferred financing costs and original issue discount | (4,512) | | | (6,639) | | Deferred financing costs and original issue discount | (3,130) | | | (3,801) | |
Total debt | Total debt | 1,035,551 | | | 1,038,799 | | Total debt | 1,026,183 | | | 1,030,887 | |
Less current maturities | Less current maturities | 10,750 | | | 10,750 | | Less current maturities | (10,750) | | | (10,750) | |
Long-term debt | Long-term debt | $ | 1,024,801 | | | $ | 1,028,049 | | Long-term debt | $ | 1,015,433 | | | $ | 1,020,137 | |
On May 26, 2021, the Company amended its existing senior credit facilities to, among other changes, extend the revolving credit facility maturity date from July 31, 2022 to May 26, 2026 (subject to a springing maturity to August 8, 2023 if more than $25 million of the term loans have not been repaid, refinanced or extended), and reduce the interest rates applicable to borrowings outstanding on the revolving credit facility. In conjunction with this credit amendment, the Company incurred $2.1 million in fees that have been capitalized in other assets on the consolidated balance sheet and are amortized over the contractual life of the revolving credit facility. There were 0 borrowings outstanding on the revolving credit facility at June 30, 2021 and December 31, 2020.
In April 24,and May 2020, the Company amended its existing senior credit facilities to, among other things, increase the borrowing capacity of the revolving credit facility from $225 million to $385 million. On May 7, 2020,$400 million, modify the Company further increased the borrowing capacity of its revolving credit facility from $385 millioninterest rates applicable to $400 million. The revolving credit facility matures on July 31, 2022. There were 0 borrowings outstanding on the revolving credit facility, at June 30, 2020 and December 31, 2019.modify the terms of the applicable covenants. In conjunction with these credit amendments, the Company incurred $2.8 million in fees that have been capitalized in other assets on the consolidated balance sheet and were being amortized over the contractual life of the revolving credit facility prior to the May 26, 2021 amendment.
All borrowings under the credit agreement are subject to variable interest. Borrowings underThe effective interest rate for the term loan facility bearwas 2.50% at June 30, 2021 and December 31, 2020, and the weighted average interest at a rate per annum of 0.75% overwas 2.50% and 3.00% for the base rate, or 1.75% over the eurocurrency rate, which is the one, two, three or six month LIBOR rate or, with applicable lender approval, the twelve month or less than one-month LIBOR rate. With respectmonths ended June 30, 2021 and 2020, respectively, prior to the term loan facility, the base rate is subject to aneffects of any interest rate floor of 1.75% and the eurocurrency rate is subject to an interest rate floor of 0.75%.hedge arrangements. Effective as of April 24, 2020,May 26, 2021, borrowings under the revolving credit facility bear interest at a rate per annum ranging from 0.50% to 1.25% over the base rate, or 1.50% to 2.25% over the eurocurrency rate and the unused commitment fee applicable to the revolving credit commitments ranges from 30 to 50 basis points. Prior to the April 2020 credit amendment, borrowings under the revolving credit facility bore interest at a rate per annum ranging from 0.50% to 0.75% over the base rate, or 1.50% to 1.75% over the eurocurrency rate.
The effective interest rate for the term loans was 2.50% and 3.55% at June 30, 2020 and December 31, 2019, respectively, and the weighted average interest rate was 3.00% and 4.24% for the six months ended June 30, 2020 and 2019, respectively, prior to the effects of any interest rate hedge arrangements. The weighted average interest rate for the revolving credit facility was 4.49%4.00% and 3.75%4.49% for the six months ended June 30, 20202021 and 2019,2020, respectively.
Certain financing fees and original issue discount costs are capitalized and are being amortized over the terms
All obligations under the senior secured credit facilities are secured by substantially all the assets of the Company’s U.S. subsidiaries. The senior secured credit facilities contain a number of covenants that, among other things and subject to certain exceptions, may restrict the ability of Bright Horizons Family Solutions LLC, the Company’s 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 ourthe Company’s subsidiaries; alter the business conducted; enter into agreements restricting the Company’s 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., the Company’s direct subsidiary, to be a passive holding company, subject to certain exceptions. Effective as of April 24, 2020, theThe revolving credit facility requires Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum first lien gross leverage ratio for four fiscal quarters, followed by a maximum first lien net leverage ratio in the quarters thereafter. The maximum first lien gross leverage ratio was 6.00 to 1.00 for the fiscal quarter ending June 30, 2020, 7.50 to 1.00 for the fiscal quarter ending September 30, 2020, 8.00 to 1.00 for the fiscal quarter ending December 31, 2020, and 7.50 to 1.00 for the fiscal quarter ending March 31, 2021. Beginning with the fiscal quarter ending June 30, 2021, the Company will be required to comply with its previous maximum first lien net leverage ratio of 4.25 to 1.00.1.00 beginning June 30, 2021. A breach of the applicable covenant is subject to certain equity cure rights. Prior to the April 2020 credit amendment, the Company was required to comply with a maximum first lien net leverage ratio.
Future principal payments of long-term debt are as follows for the years ending December 31 (in thousands):31:
| | | Term Loans | | Term Loan |
Remainder of 2020 | $ | 5,375 | | |
2021 | 10,750 | | |
| | | | (In thousands) |
Remainder of 2021 | | Remainder of 2021 | $ | 5,375 | |
2022 | 2022 | 10,750 | | 2022 | 10,750 | |
2023 | 2023 | 1,013,188 | | 2023 | 1,013,188 | |
| | Total future principal payments | Total future principal payments | $ | 1,040,063 | | Total future principal payments | $ | 1,029,313 | |
Derivative Financial Instruments
The Company is subject to interest rate risk as all borrowings under the senior secured credit facilities are subject to variable interest rates. In October 2017, the Company entered into variable-to-fixed interest rate swap agreements to mitigate the exposure to variable interest arrangements on $500 million notional amount of the outstanding term loan borrowings. These swap agreements, designated and accounted for as cash flow hedges from inception, are scheduled to mature on October 31, 2021. The Company is required to make monthly payments on the notional amount at a fixed average interest rate, plus the applicable rate for eurocurrency loans. TheEffective as of May 31, 2018, the notional amount is subject to a total interest rate of approximately 3.65%. In exchange, the Company receives interest on the notional amount at a variable rate based on the one-month LIBOR rate, subject to a 0.75% floor.
In June 2020, the Company entered into interest rate cap agreements with a total notional value of $800 million, designated and accounted for as cash flow hedges from inception, to provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 1%. 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 a forward starting effective date of October 29, 2021, which coincides with the maturity of the interest rate swap agreements, and expire on October 31, 2023.
The interest rate swaps and interest rate caps are recorded on the Company’s consolidated balance sheet at fair value and classified based on the instruments’ maturity dates. The Company records gains orand losses resulting from changes in the fair value of the interest rate swaps and interest rate caps to accumulated other comprehensive income or loss. These gains orand losses are subsequently reclassified into earnings and recognized to interest expense in the Company’s consolidated statement of income in the period that the hedged interest expense on the term loan facility is recognized. The premium paid for the interest rate cap was recorded as an asset and will be allocated to each of the individual hedged interest payments on the basis of their relative fair values. The change in each respective allocated fair value amount will be reclassified out of accumulated other comprehensive income when each of the hedged forecasted transactions impacts earnings and recognized to interest expense in the Company's consolidated statement of income.
As of June 30, 2020 and December 31, 2019, theThe fair value of the derivative financial instruments was as follows (in thousands):for the periods presented:
| Derivative financial instruments | Derivative financial instruments | | Consolidated balance sheet classification | | June 30, 2020 | | December 31, 2019 | Derivative financial instruments | | Consolidated balance sheet classification | | June 30, 2021 | | December 31, 2020 |
| | | | (In thousands) |
Interest rate swaps - liability | Interest rate swaps - liability | | Other long-term liabilities | | $ | (7,580) | | | $ | (2,850) | | Interest rate swaps - liability | | Other current liabilities | | $ | 1,911 | | | $ | 4,775 | |
Interest rate caps - asset | Interest rate caps - asset | | Other assets | | $ | 1,231 | | | $ | — | | Interest rate caps - asset | | Other assets | | $ | 1,141 | | | $ | 277 | |
For the three months ended June 30, 2020, theThe effect of the derivative financial instruments on other comprehensive income (loss) was as follows (in thousands):follows:
| Derivatives designated as cash flow hedging instruments | Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) | Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) |
Interest rate swaps | | $ | (68) | | | Interest expense — net | | $ | (1,356) | | | $ | 1,288 | | |
Interest rate caps | | (151) | | | Interest expense — net | | — | | | (151) | | |
| | | | (In thousands) | | (In thousands) |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | |
Cash flow hedges | | Cash flow hedges | | $ | (138) | | | Interest expense — net | | $ | (1,471) | | | $ | 1,333 | |
Income tax effect | Income tax effect | | 59 | | | Income tax expense | | 365 | | | (306) | | Income tax effect | | 37 | | | Income tax expense | | 393 | | | (356) | |
Net of income taxes | Net of income taxes | | $ | (160) | | | $ | (991) | | | $ | 831 | | Net of income taxes | | $ | (101) | | | $ | (1,078) | | | $ | 977 | |
| Three months ended June 30, 2020 | | Three months ended June 30, 2020 | |
Cash flow hedges | | Cash flow hedges | | $ | (219) | | | Interest expense — net | | $ | (1,356) | | | $ | 1,137 | |
Income tax effect | | Income tax effect | | 59 | | | Income tax expense | | 365 | | | (306) | |
Net of income taxes | | Net of income taxes | | $ | (160) | | | $ | (991) | | | $ | 831 | |
For the three months ended June 30, 2019, the effect of the interest rate swap agreements on other comprehensive income (loss) was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) |
Interest rate swaps | | $ | (5,260) | | | Interest expense — net | | $ | 724 | | | $ | (5,984) | |
Income tax effect | | 1,415 | | | Income tax expense | | (195) | | | 1,610 | |
Net of income taxes | | $ | (3,845) | | | | | $ | 529 | | | $ | (4,374) | |
For the six months ended June 30, 2020, the effect of the derivative financial instruments on other comprehensive income (loss) was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) |
Interest rate swaps | | $ | (6,370) | | | Interest expense — net | | $ | (1,641) | | | $ | (4,729) | |
Interest rate caps | | (151) | | | Interest expense — net | | — | | | (151) | |
Income tax effect | | 1,754 | | | Income tax expense | | 442 | | | 1,312 | |
Net of income taxes | | $ | (4,767) | | | | | $ | (1,199) | | | $ | (3,568) | |
For the six months ended June 30, 2019, the effect of the interest rate swap agreements on other comprehensive income (loss) was as follows (in thousands):
| Derivatives designated as cash flow hedging instruments | Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) | Derivatives designated as cash flow hedging instruments | | Amount of gain (loss) recognized in other comprehensive income (loss) | | Consolidated statement of income classification | | Amount of net gain (loss) reclassified into earnings | | Total effect on other comprehensive income (loss) |
Interest rate swaps | | $ | (8,449) | | | Interest expense — net | | $ | 1,480 | | | $ | (9,929) | | |
| | | | (In thousands) | | (In thousands) |
Six months ended June 30, 2021 | | Six months ended June 30, 2021 | |
Cash flow hedges | | Cash flow hedges | | $ | 840 | | | Interest expense — net | | $ | (2,921) | | | $ | 3,761 | |
Income tax effect | Income tax effect | | 2,273 | | | Income tax expense | | (398) | | | 2,671 | | Income tax effect | | (224) | | | Income tax expense | | 780 | | | (1,004) | |
Net of income taxes | Net of income taxes | | $ | (6,176) | | | $ | 1,082 | | | $ | (7,258) | | Net of income taxes | | $ | 616 | | | $ | (2,141) | | | $ | 2,757 | |
| Six months ended June 30, 2020 | | Six months ended June 30, 2020 | |
Cash flow hedges | | Cash flow hedges | | $ | (6,521) | | | Interest expense — net | | $ | (1,641) | | | $ | (4,880) | |
Income tax effect | | Income tax effect | | 1,754 | | | Income tax expense | | 442 | | | 1,312 | |
Net of income taxes | | Net of income taxes | | $ | (4,767) | | | $ | (1,199) | | | $ | (3,568) | |
During the next twelve months, the Company estimates that a net loss of $5.8$2.2 million, pre-tax, will be reclassified from accumulated other comprehensive income (loss) and recorded to interest expense related to these derivative financial instruments.
7. EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share using the two-class method (in thousands, except share and per share amounts):method:
| | | | Three months ended June 30, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | | | | | | | | | | | | | | | | | (In thousands, except share data) |
Basic earnings per share: | Basic earnings per share: | Three months ended June 30, | | | Six months ended June 30, | | Basic earnings per share: | |
| 2020 | | 2019 | | 2020 | | 2019 | |
Net income | Net income | $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
Allocation of net income to common stockholders: | Allocation of net income to common stockholders: | | Allocation of net income to common stockholders: |
Common stock | Common stock | $ | 358 | | | $ | 49,088 | | | $ | 30,945 | | | $ | 90,933 | | Common stock | $ | 18,733 | | | $ | 358 | | | $ | 25,838 | | | $ | 30,945 | |
Unvested participating shares | Unvested participating shares | 1 | | | 239 | | | 146 | | | 436 | | Unvested participating shares | 82 | | | 1 | | | 109 | | | 146 | |
| $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | |
Net income | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: |
Common stock | Common stock | 59,631,428 | | | 57,847,630 | | | 58,781,169 | | | 57,763,335 | | Common stock | 60,551,528 | | | 59,631,428 | | | 60,573,237 | | | 58,781,169 | |
Unvested participating shares | Unvested participating shares | 250,427 | | | 281,387 | | | 262,614 | | | 276,270 | | Unvested participating shares | 263,957 | | | 250,427 | | | 249,571 | | | 262,614 | |
Earnings per common share: | Earnings per common share: | | Earnings per common share: | |
Common stock | Common stock | $ | 0.01 | | | $ | 0.85 | | | $ | 0.53 | | | $ | 1.57 | | Common stock | $ | 0.31 | | | $ | 0.01 | | | $ | 0.43 | | | $ | 0.53 | |
| | | | Three months ended June 30, | | Six months ended June 30, |
| | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | | | | | | | | | | | | | | | | | (In thousands, except share data) |
Diluted earnings per share: | Diluted earnings per share: | Three months ended June 30, | | | Six months ended June 30, | | Diluted earnings per share: | |
| 2020 | | 2019 | | 2020 | | 2019 | |
Earnings allocated to common stock | Earnings allocated to common stock | $ | 358 | | | $ | 49,088 | | | $ | 30,945 | | | $ | 90,933 | | Earnings allocated to common stock | $ | 18,733 | | | $ | 358 | | | $ | 25,838 | | | $ | 30,945 | |
Earnings allocated to unvested participating shares | 1 | | | 239 | | | 146 | | | 436 | | |
Adjusted earnings allocated to unvested participating shares | (1) | | | (234) | | | (144) | | | (427) | | |
Plus: earnings allocated to unvested participating shares | | Plus: earnings allocated to unvested participating shares | 82 | | | 1 | | | 109 | | | 146 | |
Less: adjusted earnings allocated to unvested participating shares | | Less: adjusted earnings allocated to unvested participating shares | (81) | | | (1) | | | (108) | | | (144) | |
Earnings allocated to common stock | Earnings allocated to common stock | $ | 358 | | | $ | 49,093 | | | $ | 30,947 | | | $ | 90,942 | | Earnings allocated to common stock | $ | 18,734 | | | $ | 358 | | | $ | 25,839 | | | $ | 30,947 | |
| Weighted average common shares outstanding: | Weighted average common shares outstanding: | | Weighted average common shares outstanding: |
Common stock | Common stock | 59,631,428 | | | 57,847,630 | | | 58,781,169 | | | 57,763,335 | | Common stock | 60,551,528 | | | 59,631,428 | | | 60,573,237 | | | 58,781,169 | |
Effect of dilutive securities | Effect of dilutive securities | 634,674 | | | 1,092,133 | | | 791,275 | | | 1,082,738 | | Effect of dilutive securities | 555,264 | | | 634,674 | | | 643,146 | | | 791,275 | |
| 60,266,102 | | | 58,939,763 | | | 59,572,444 | | | 58,846,073 | | |
Weighted average common shares outstanding — diluted | | Weighted average common shares outstanding — diluted | 61,106,792 | | | 60,266,102 | | | 61,216,383 | | | 59,572,444 | |
Earnings per common share: | Earnings per common share: | | | | | | | | Earnings per common share: | | | | | | | |
Common stock | Common stock | $ | 0.01 | | | $ | 0.83 | | | $ | 0.52 | | | $ | 1.55 | | Common stock | $ | 0.31 | | | $ | 0.01 | | | $ | 0.42 | | | $ | 0.52 | |
Options outstanding to purchase 1.21.0 million and 0.81.2 million shares of common stock were excluded from diluted earnings per share for the three months ended June 30, 2021 and 2020, respectively, and 2019, respectively,0.9 million and 0.8 million shares of common stock were excluded for both the six months ended June 30, 2021 and 2020, and 2019,respectively, since their effect was anti-dilutive. These options may become dilutive in the future.
8. INCOME TAXES
The Company’s effective income tax rates were 23.0% and (135.4)% and 21.8% for the three months ended June 30, 20202021 and 2019,2020, respectively, and 3.0%10.9% and 19.9%3.0% for the six months ended June 30, 2021 and 2020, and 2019, respectively. For the three and six months ended June 30, 2020, the Company’s annual effective tax rate was highly sensitive to changes in estimates of total ordinary income (loss), and therefore a reliable estimate could not be made. Accordingly, the actual effective tax rate for the year-to-date period has been used. The effective income tax rate may fluctuate from quarter to quarter for various reasons, including changes to income (loss) before income tax, jurisdictional mix of income (loss) before income tax, valuation allowances, jurisdictional income tax rate changes, as well as discrete items such as the settlement of foreign, federal and state tax issues and the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock, which is included as a reduction of tax expense. During the three and six months ended June 30, 2021, the excess tax benefit from stock-based compensation expense decreased tax expense by $1.2 million and $5.1 million, respectively. During the three and six months ended June 30, 2020, the excess tax benefit from stock-based compensation expense decreased tax expense by $1.7 million and $8.6 million, respectively. DuringFor the three and six months ended June 30, 2019,2021, prior to the inclusion of the excess tax benefit from stock-based compensation expense decreasedand other discrete items, the effective income tax expense by $2.8 million and $7.4 million, respectively.rate approximated 28%. For the three and six months ended June 30, 2020, prior to the inclusion of the excess tax benefit and other discrete items, the effective income tax rate approximated 29%. For the three and six months ended June 30, 2019, prior to the inclusion of the excess tax benefit, the effective income tax rate approximated 26%.
The Company’s unrecognized tax benefits were $3.7$3.8 million at June 30, 20202021 and $4.3$4.0 million at December 31, 2019,2020, inclusive of interest. The Company settled an open tax matter during the quarter resulting in a decrease in the unrecognized tax benefits of $0.4 million. 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 statute of limitations lapses. The impact of the amount of such changes to previously recorded uncertain tax positions could range from 0 to $0.3$2.4 million.
The Company and its domestic subsidiaries are subject to audit for 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 tax returns is three years. The Company’s filings for the tax years 20162017 through 20192020 are subject to audit based upon the federal statute of limitations.
State income tax returns are generally subject to examination for a period of three to four 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. The Company’s filings forAs of June 30, 2021, there were 2 income tax audits in process and the tax years from 20152016 to 20192020 are subject to audit and, as of June 30, 2020, there was 1 state audit in process.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 five years.
9. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are classified using a three-level 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 and the lowest priority to unobservable inputs. The Company uses observable inputs where relevant and whenever possible. The three levels of the hierarchy are defined as follows:
Level 1 — Fair value is derived using quoted prices from active markets for identical instruments.
Level 2 — Fair value is derived using quoted prices for similar instruments from active markets or for identical or similar instruments in markets that are not active; or, fair value is based on model-derived valuations in which all significant inputs and significant value drivers are observable from active markets.
Level 3 — Fair value is derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses approximates their fair value because of their short-term nature.
Financial instruments that potentially expose the Company to concentrations of credit risk consistconsisted mainly of cash and cash equivalents and accounts receivable. During the six months ended June 30, 2020, the Company experienced a significant increase in cash and cash equivalents resulting from the $249.8 million net proceeds received from the capital raised. Additionally, the Company experienced a significant increase in accounts receivable and the related allowance for credit losses, resulting from the increase in demand for its back-up care services, as further described in Note 1, Organization and Basis of Presentation. The Company mitigates its exposure by maintaining its cash and cash equivalents in financial institutions of high credit standing. The Company’s accounts receivable is derived primarily from the services it provides, and the related credit risk is 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. Even though these significant increases result in increased exposure to credit risk, noNo significant credit concentration risk existed at June 30, 2020.2021.
Long-term Debt — The Company’s long-term debt is recorded at adjusted cost, net of original issue discounts and deferred financing costs. The fair value of the Company’s long-term debt is based on current bid prices, which approximates carrying value. As such, the Company’s long-term debt was classified as Level 1, as defined under U.S. GAAP.1. As of June 30, 2021, the carrying value and estimated fair value of long-term debt were both $1.03 billion. As of December 31, 2020, the carrying value and estimated fair value of long-term debt was $1.04were $1.03 billion and $1.01$1.02 billion, respectively. As of December 31, 2019, the carrying value and estimated fair value of long-term debt was $1.05 billion.
Derivative Financial Instruments — The Company’s interest rate swap agreements and interest rate cap agreements are recorded at fair value, which were estimated using market-standard valuation models. Such models project future cash flows and discount the future amounts to a present value using market-based observable inputs. Additionally, the fair value of the interest rate swaps and interest rate caps included consideration of credit risk. The Company used a potential future exposure model to estimate this credit valuation adjustment (“CVA”). The inputs to the CVA were largely based on observable market data, with the exception of certain assumptions regarding credit worthiness. As the magnitude of the CVA was not a significant component of the fair value of the interest rate swaps and interest rate caps, it was not considered a significant input. The fair value of the interest rate swaps and interest rate caps are classified as Level 2, as defined under U.S. GAAP.2. As of June 30, 20202021 and December 31, 2019,2020, the fair value of the interest rate swap agreements was a liability of $7.6$1.9 million and $2.9$4.8 million, respectively, which were recorded in other long-termcurrent liabilities on the consolidated balance sheets.sheet. As of June 30, 2021 and December 31, 2020, the fair value of the interest rate cap agreements was $1.2$1.1 million and $0.3 million, respectively, which waswere recorded in other assets on the consolidated balance sheet.
Debt Securities — The Company’s investments in debt securities, which are classified as available-for-sale, consist of U.S. Treasury and U.S. government agency securities and certificatecertificates of deposits.deposit. These securities are held in escrow by the Company’s wholly-owned captive insurance company and were purchased with restricted cash. As such, these securities are not available to fund the Company’s operations. These securities are recorded at fair value using quoted prices available in active markets. As such, the Company’s debt securitiesmarkets and are classified as Level 1, as defined under U.S. GAAP.1. As of June 30, 2020,2021, the fair value of the available-for-sale debt securities was $24.1$25.9 million and was classified based on the instruments’ maturity dates, with $21.2$21.5 million included in prepaid expenses and other current assets and $2.9$4.4 million in other assets on the consolidated balance sheet. As of December 31, 2019,2020, the fair value of the available-for-sale debt securities was $24.9$27.9 million, with $17.0$21.5 million included in prepaid expenses and other current assets and $7.9$6.4 million in other assets on the consolidated balance sheet. At June 30, 20202021 and December 31, 2019,2020, the amortized cost was $23.9$25.9 million and $24.9$27.9 million, respectively. The debt securities held at June 30, 20202021 had remaining maturities ranging from less than one year to approximately 1.5 years. Unrealized gains and losses, net of tax, on available-for-sale debt securities are included in accumulated other comprehensive income (loss), and were immaterial for the three and six months ended June 30, 20202021 and 2019. The Company did not realize any gains or losses on its debt securities during the three and six months ended June 30, 2020 and 2019.2020.
Liabilities for Contingent Consideration — The Company is subject to contingent consideration arrangements in connection with certain business combinations as disclosed in Note 4, Acquisitions.combinations. Liabilities for contingent consideration are measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration payable for the related business combination and subsequent changes in fair value recorded to selling, general and administrative expenses inon the Company’s consolidated statement of income. The fair value of the contingent consideration was generally calculated using a real options modelcustomary valuation models based on probability-weighted outcomes of meeting certain future performance targets.targets and forecasted results. The key inputs to the valuationvaluations are the projections of future financial results in relation to the business.businesses and the company-specific discount rates. The CompanyCompany classified the contingent consideration liabilityliabilities as a Level 3 fair value measurement due to the lack of observable inputs used in the model. The contingent consideration liabilities outstanding as of June 30, 2021 related to 2019 and 2021 acquisitions. See Note 4, Acquisitions, for additional information.
The following table provides a roll forward of the fair value of recurring Level 3 fair value measurements (in thousands):measurements:
| | | | | |
| Six months ended June 30, 20202021 |
| |
| (In thousands) |
Balance at January 1, 20202021 | $ | 15,98713,721 | |
| |
SettlementIssuance of contingent consideration liabilitiesin connection with acquisitions | (1,088)7,337 | |
| |
| |
Changes in fair value | 422379 | |
Foreign currency translation | (1,044)100 | |
Balance at June 30, 20202021 | $ | 14,27721,537 | |
Nonrecurring fair value estimateFair Value Estimates — During the three and six months ended June 30, 2020, the Company recognized impairment losses of $11.9 million and $16.9 million, respectively, on fixed assets and operating lease right-of-use assets for certain centers. The impairment losses were included in cost of services on the consolidated statement of income, which have been allocated to the full service center-based child care segment. The estimated fair value of the applicable center long-lived assets was based on the fair value of the asset groups, calculated using a discounted cash flow model, with unobservable inputs. The fair value of the fixed assets was insignificant given the current and expected cash flows of these centers and the valuation of the lease right-of-use-assets considered the amount a market participant would pay for use of the asset. The Company classified the center long-lived assets as a Level 3 fair value measurement due to the lack of observable inputs used in the model.
During the three and six months ended June 30, 2020, the Company recognized a $2.1 million impairment loss on an equity investment. The impairment loss was included in cost of services on the consolidated statement of income, which has been allocated to the back-up care segment. The estimated fair value of the equity investment was based on a qualitative assessment, that considered the current economic environment, business prospects and transaction information in the entity's securities, among other factors considered. The Company classified the equity investment as a Level 3 fair value measurement due to the lack of observable inputs.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss), which is included as a component of stockholders’ equity, is comprised of foreign currency translation adjustments and unrealized gains (losses) on cash flow hedges and investments, net of tax.
The changes in accumulated other comprehensive income (loss) by component were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2020 | | | | | | | | |
| Foreign currency translation adjustments | | Unrealized gain (loss) on interest rate swaps | | Unrealized gain (loss) on interest rate caps | | Unrealized gain (loss) on investments | | Total |
Balance at January 1, 2020 | $ | (47,835) | | | $ | (2,566) | | | $ | — | | | $ | 70 | | | $ | (50,331) | |
Other comprehensive income (loss) before reclassifications, net of tax | (37,951) | | | (4,656) | | | (111) | | | 91 | | | (42,627) | |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | — | | | 1,199 | | | — | | | — | | | 1,199 | |
Net other comprehensive income (loss) | (37,951) | | | (3,457) | | | (111) | | | 91 | | | (41,428) | |
Balance at June 30, 2020 | $ | (85,786) | | | $ | (6,023) | | | $ | (111) | | | $ | 161 | | | $ | (91,759) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
Foreign currency translation adjustments (1) | | Unrealized gain (loss) on cash flow hedges | | Unrealized gain (loss) on investments | | Total |
| | | | | | | |
| (In thousands) |
Balance at January 1, 2021 | $ | (22,332) | | | $ | (4,785) | | | $ | 48 | | | $ | (27,069) | |
Other comprehensive income (loss) before reclassifications — net of tax | 1,086 | | | 616 | | | (41) | | | 1,661 | |
Less: amounts reclassified from accumulated other comprehensive income (loss) — net of tax | 387 | | | (2,141) | | | — | | | (1,754) | |
Net other comprehensive income (loss) | 699 | | | 2,757 | | | (41) | | | 3,415 | |
Balance at June 30, 2021 | $ | (21,633) | | | $ | (2,028) | | | $ | 7 | | | $ | (23,654) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2019 | | | | | | |
| Foreign currency translation adjustments | | Unrealized gain (loss) on interest rate swaps | | Unrealized gain (loss) on investments | | Total |
Balance at January 1, 2019 | $ | (67,648) | | | $ | 5,293 | | | $ | — | | | $ | (62,355) | |
Other comprehensive income (loss) before reclassifications, net of tax | (3,818) | | | (6,176) | | | 88 | | | (9,906) | |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | — | | | (1,082) | | | — | | | (1,082) | |
Net other comprehensive income (loss) | (3,818) | | | (7,258) | | | 88 | | | (10,988) | |
Balance at June 30, 2019 | $ | (71,466) | | | $ | (1,965) | | | $ | 88 | | | $ | (73,343) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2020 |
Foreign currency translation adjustments (1) | | Unrealized gain (loss) on cash flow hedges | | Unrealized gain (loss) on investments | | Total |
| | | | | | | |
| (In thousands) |
Balance at January 1, 2020 | $ | (47,835) | | | $ | (2,566) | | | $ | 70 | | | $ | (50,331) | |
Other comprehensive income (loss) before reclassifications — net of tax | (37,951) | | | (4,767) | | | 91 | | | (42,627) | |
Less: amounts reclassified from accumulated other comprehensive income (loss) — net of tax | 0 | | | (1,199) | | | — | | | (1,199) | |
Net other comprehensive income (loss) | (37,951) | | | (3,568) | | | 91 | | | (41,428) | |
Balance at June 30, 2020 | $ | (85,786) | | | $ | (6,134) | | | $ | 161 | | | $ | (91,759) | |
(1)Taxes are not provided for the currency translation adjustments related to the undistributed earnings of foreign subsidiaries that are intended to be indefinitely reinvested.
11. SEGMENT INFORMATION
The Company’s servicesreportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory services, which also represent the Company’s 3 operating and reportable segments.other services. The full service center-based child care segment includes the traditional center-based early education and child care, and early education, preschool, and elementary education. The Company’s back-up care segment consists of center-based back-up child care, in-home child and adult/elder care, and self-sourced reimbursed care. The Company’s educational advisory and other services segment consists of tuition assistance and student loan repayment program administration, workforce education and related educational consulting services, andadvising, college admissions advisory services.services, and an online marketplace for families and caregivers, which have been aggregated as they do not meet the thresholds for separate disclosure. The Company and its chief operating decision maker evaluate performance based on revenues and income (loss) from operations. Intercompany activity is eliminated in the segment results. The assets and liabilities of the Company are managed centrally and are reported internally in the same manner as the consolidated financial statements; therefore, no segment asset information is produced or included herein.
Revenue and income (loss) from operations by reportable segment were as follows (in thousands):follows:
| | | | Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | (In thousands) |
Three months ended June 30, 2021 | | Three months ended June 30, 2021 | |
Revenue | | Revenue | $ | 334,427 | | | $ | 81,484 | | | $ | 25,567 | | | $ | 441,478 | |
Income from operations | | Income from operations | 4,062 | | | 24,769 | | | 5,181 | | | 34,012 | |
| | Full service center-based child care | | Back-up care | | Educational advisory services | | Total | |
Three months ended June 30, 2020 | Three months ended June 30, 2020 | | | | | | | | Three months ended June 30, 2020 | |
Revenue | Revenue | $ | 137,306 | | | $ | 135,904 | | | $ | 20,562 | | | $ | 293,772 | | Revenue | $ | 137,306 | | | $ | 135,904 | | | $ | 20,562 | | | $ | 293,772 | |
Income (loss) from operations (1) | Income (loss) from operations (1) | (71,842) | | | 75,121 | | | 4,835 | | | 8,114 | | Income (loss) from operations (1) | (71,842) | | | 75,121 | | | 4,835 | | | 8,114 | |
| Three months ended June 30, 2019 | | |
Revenue | $ | 438,580 | | | $ | 70,049 | | | $ | 19,431 | | | $ | 528,060 | | |
Income from operations | 51,827 | | | 18,434 | | | 4,572 | | | 74,833 | | |
(1)For the three months ended June 30, 2020, income (loss) from operations included impairment costs of $14.0 million, due to the impact of the COVID-19 pandemic, of which $6.7 million related to fixed assets and $5.2 million related to operating lease right-of-use assets in the full service center-based child care segment, and $2.1 million related to an equity investment in the back-up care segment. Additionally, loss from operations in the full service center-based child care segment included $4.4 million in costs primarily associated with the closure of centers, including related severance and facilities costs.
| | | | Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | (In thousands) |
Six months ended June 30, 2021 | | Six months ended June 30, 2021 | |
Revenue | | Revenue | $ | 624,746 | | | $ | 157,839 | | | $ | 49,733 | | | $ | 832,318 | |
Income (loss) from operations | | Income (loss) from operations | (13,905) | | | 51,959 | | | 9,666 | | | 47,720 | |
| | Full service center-based child care | | Back-up care | | Educational advisory services | | Total | |
Six months ended June 30, 2020 | Six months ended June 30, 2020 | | | | | | | | Six months ended June 30, 2020 | |
Revenue | Revenue | $ | 548,697 | | | $ | 210,071 | | | $ | 41,327 | | | $ | 800,095 | | Revenue | $ | 548,697 | | | $ | 210,071 | | | $ | 41,327 | | | $ | 800,095 | |
Income (loss) from operations (1) | Income (loss) from operations (1) | (55,095) | | | 97,360 | | | 9,130 | | | 51,395 | | Income (loss) from operations (1) | (55,095) | | | 97,360 | | | 9,130 | | | 51,395 | |
| Six months ended June 30, 2019 | | |
Revenue | $ | 856,900 | | | $ | 134,743 | | | $ | 38,175 | | | $ | 1,029,818 | | |
Income from operations (2) | 93,357 | | | 35,551 | | | 8,835 | | | 137,743 | | |
(1)For the six months ended June 30, 2020, income (loss) from operations included impairment costs of $19.0 million, due to the impact of the COVID-19 pandemic, of which $11.7 million related to fixed assets and $5.2 million related to operating lease right-of-use assets in the full service center-based child care segment, and $2.1 million related to an equity investment in the back-up care segment. Additionally, loss from operations in the full service center-based child care segment included $4.4 million in costs primarily associated with the closure of centers, including related severance and facilities costs.
(2) For the six months ended June 30, 2019, income from operations included expenses incurred in connection with completed acquisitions of $0.4 million, which have been allocated to the back-up care segment.
12. CONTINGENCIES
Litigation
The Company is a defendant in certain legal matters in the ordinary course of business and records accruals for outstanding legal matters when the Company believes it is probable that a loss has been incurred, and the amount can be reasonably estimated. The Company is currently subject to a governmental investigation and may be subject to one or more health and safety charges in the United Kingdom related to an incident at a Company nursery in July 2019. The Company accrued a liability with respect to this matter, which is reflected in the consolidated financial statements, but is not considered material. While the outcome is inherently uncertain and may be subject to liability in excess of the accrual, the Company does not expect this matter to have a material adverse effect on the Company’s consolidated financial position. The Company's accruals for outstanding legal matters are not material, individually or in the aggregate, to the Company's consolidated financial position. Management believes the resolution of such pending legal matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows, although the Company cannot predict the ultimate outcome of any such actions.
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 and liquidity, the impact of COVID-19 and its variants on our near term or longerand long- term operations, our expectations around center closures and timing of center re-openings, our phased re-opening plans andthe timing to open a significant portion oftemporarily closed centers, by September 30, 2020, permanent center closures, the continued operation of currently open centers, timing to re-enroll and re-ramp centers as well as certain back-up care services, enrollment recovery, our reductions in discretionary spendingcost management and cost-saving initiatives and capital spending, labor costs and labor market, impact of government mandates, continued growth inperformance and contributions from our back-up care segment, use of back-up care solutions, access to and impact of government relief and support programs including tax deferrals and credits, leases, lease deferrals and timing for payment, ability to respond to changing market conditions, our growth, growth in educational advisory services, our strategies, the industries in which we and our partners operate, demand for services, macroeconomic trends, investments in user experience and service delivery, the impact of accounting principles, pronouncements and policies, acquisitions and expected synergies, our fair value estimates, impairment losses, 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, future impact of excess tax benefits, estimates and adjustments, amortization expense, the impact of foreign currency exchange rates, our credit risk, the impact of seasonality on results of operations, our share repurchase program, the outcome of litigation, legal proceedings and our insurance coverage, debt securities, our interest rate swaps and caps, interest rates and projections, interest expense, the use of derivatives or other market risk sensitive instruments, our indebtedness, borrowings under our senior credit facility and revolving credit facility, the need for additional debt or equity financings 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 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 includeddisclosed in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, including with respect to the impacts from the ongoing COVID-19 pandemic, as well as the risks listed in Part II, Item 1A, “Risk Factors,” of this Quarterly Report, and 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.
Introduction, Overview and COVID-19 Update
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 and six months ended June 30, 2020,2021, as compared to the three and six months ended June 30, 2019.2020. 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 fiscal year ended December 31, 2019.2020.
We are a leading provider of high-quality education and care, including early education and child care, back-up and early education, back-upfamily care solutions, and workforce education services that are designed to help employers and theirclient employees better integrate work and family life, as well as to grow their careers. Our operating and reporting segments are comprised of full service center-based child care, back-up care, and educational advisory services.
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 improve employee recruitment, employee engagement, productivity, recruitmentretention and retention.career advancement. As of June 30, 2020,2021, we had more than 1,2001,300 client relationships with employers across a diverse array of industries, including more than 175190 Fortune 500 companies and more than 80 of Working Mother magazine’s 20192020 “100 Best Companies.”
At June 30, 2020,2021, we managed the operations of 1,076operated 1,006 early education and child care and early education centers, compared to 1,0831,076 centers at June 30, 2019,2020, and had the capacity to serve approximately 120,000113,000 children and their families in the United States, the United Kingdom, the Netherlands, Canada and India. At June 30, 2021, approximately 920, or 90%, of our child care centers were open.
InOur reportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory and other services, which includes tuition assistance and student loan repayment program administration, workforce education and related educational advising, college admissions advisory services, and an online marketplace for families and caregivers.
Since March 2020, we began to experience the impact ofour global operations have been significantly impacted by the COVID-19 pandemic on our business, which has substantially disrupted our global operations. In mid-March,and the measures to prevent its spread, such as a result of theperiodically reinstated lockdowns and required business and school closures and shelter-in-place government mandates, we beganrestrictions. We remain focused on the temporary closure of a significant portionre-enrollment of our child care centers while continuing to operate critical health care client and “hub” centers to provide care and support services to the children whose parents work on the front lines of the response. As countries and local jurisdictions have begun to lift certain restrictions and re-open, we commenced a phased re-opening of ourthe limited number of centers that remain temporarily closed, centers. As of June 30, 2020, over 400 of our child care centers were operating. Open centers are operating with specific COVID-19 protocols in place in order to protect the healthwhich we expect will continue throughout 2021. The broad and safety of children, families and staff, including social distancing procedures for pick-up and drop-off, daily health checks, the use of face masks by our staff, limited group sizes, and enhanced hygiene and cleaning practices. We plan to continue this phased re-opening through the third and fourth quarters of 2020, and potentially in subsequent periods, and currently expect to have more than 85% of our centers open by September 30, 2020. The status of our operations is as follows:
•United States: As of June 30, 2020, we were operating approximately 210 centers, most of which are employer-sponsored centers, and approximately 500 centers remained temporarily closed. As of July 31, 2020, we had re-opened a further 180 centers, bringing the total operating locations to 390 centers. We are continuously monitoring guidance and taking direction from medical experts, the Centers for Disease Control and Prevention (“CDC”) and local, state and federal government authorities in order to determine the timing and cadence of re-opening our remaining temporarily closed centers.
•United Kingdom:As of June 30, 2020, we were operating approximately 135 centers, and approximately 170 centers remained temporarily closed. As of July 31, 2020, we had re-opened a further 130 centers, bringing the total operating locations to 265 centers. We are continuously monitoring guidance from the U.K. health authorities in order to determine the timing and cadence of re-opening our remaining temporarily closed centers.
•Netherlands: We operate 61 centers in the Netherlands, which have remained operational under the Dutch government mandate that requires nurseries to remain open to serve the children of parents who work in vital professions, such as health care or emergency services. In May 2020, the Dutch government lifted restrictions and centers opened to all families.
•Back-up Care and Educational Advisory: Our back-up care and educational advisory services segments have remained fully operational and available for our clients and their employees. In response to the acute need for child care support, we expanded back-up care services and the availability of self-sourced reimbursed care, a reimbursement program for clients to utilize in emergency-type situations. This pivot provided great value to our clients and their employees and, as a result, supported the economics of our business in the second quarter while a significant portion of our child care centers remained temporarily closed.
This is a fluid and continuously changing environment. The broadlong-term effects of COVID-19, its duration and the scope of the ongoing disruption, including the pace of re-opening our remaining temporarily closed centers and re-ramping of enrollment at centers that have re-opened,related disruptions cannot be predicted and isare affected by many interdependent variables and decisions by government authorities and our client partners, as well as our client partners. Therefore,demand, economic, workforce and labor market trends, the negative financial impact to our resultsadoption and future financial or operational performance cannot be reasonably estimated. The timingeffectiveness of vaccines, and cadencedevelopments in the persistence and treatment of re-opening the remaining temporarily closed centers will vary by jurisdictionCOVID-19 and will be guided by factors such as government requirements, parent and client demand, as well as guidance and directives from medical experts and the CDC. Therefore, although we currently anticipate that more than 85% of our centers will re-open by September 30, 2020, the timing and cadence of re-opening the remaining temporarily closed centers may change as we continue to evaluate local conditions and factors governing opening decisions, including federal and state guidelines.its variants. We cannot anticipate how long it will take for re-opened centers to reach typical enrollment levels and there is no assurance that centers currently open will continue to operate. Additionally, as we continue to analyze the current environment, we may decide to not re-open certain centers in locations where demand, economic and economicworkforce trends have shifted. While we have recently experienced unprecedented demand for back-up care services, such as in-home care and self-sourced reimbursed care, and minimal disruption to providing educational advisory services, these conditions and trends may not continue in subsequent periods. As businesses and families adapt to new conditions in the coming months, we expect our back-up care services to return to primarily in-center and in-home service delivery at more normalized levels going forward. Given these factors, weWe currently expect the effects of COVID-19 to our business to continue to adversely impact our results of operations for the remainder of 2020, and potentially in subsequent periods.2021.
In response to these developments, we have implemented measures in an effort to manage costs and improve liquidity and access to financial resources, and thereby mitigate the impact on our financial position and operations. These measures include, but are not limited to, the following:
•furloughing a significant portion of our employees in proportion to the number of center closures, including center personnel for temporarily closed centers and related support functions in our corporate offices;
•reducing discretionary spending and overhead costs, while prioritizing investments that support current operations and deferring to future periods nonessential and discretionary investments;
•temporary voluntary reductions in compensation to certain executive officers and board members;
•participating in government assistance programs, including tax deferrals, tax credits and employee wage support;
•renegotiating payment terms with vendors and landlords;
•temporary suspension of share repurchases;
•amending our credit agreement in April 2020 and May 2020 to increase the borrowing capacity of our revolving credit facility from $225 million to $400 million; and,
•raising $249.8 million in net proceeds from the issuance and sale of common stock in April 2020.
We will continue to work withmonitor and respond to the changing conditions, challenges and disruptions resulting from the COVID-19 pandemic, and the changing needs of clients, families and children, while remaining focused on our local teamsstrategic priorities to deliver high quality education and care services, connect across our service lines, extend our impact on the operational decisionsnew customers and prudent management ofclients, and preserve our spending to support the current operations, while we continue to re-ramp enrollment and re-open the remainder of our business.strong culture. These challenging times highlighthave demonstrated our crisis management abilities, our critical role in the business continuity plans of our client partners, our leadership in developing and implementing enhanced health and safety protocols, and the value that our unique service offering provides to the families and clients we serve. We remain confident in our business model, the strength of our client partnerships, the strength of our balance sheet and liquidity position, and our ability to continue to respond to changing market conditions. Refer to Note 1, Organization and Basis of Presentation, in our condensed consolidated financial statements for additional information on the impact of COVID-19 to our business.
Results of Operations
The following table sets forth statement of income data as a percentage of revenue for the three months ended June 30, 20202021 and 2019 (in thousands, except percentages):2020:
| | | | Three Months Ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | 2021 | | % | | 2020 | | % |
| | Three Months Ended June 30, | | | | | | | | | |
| | 2020 | | % | | 2019 | | % | | (In thousands, except percentages) |
Revenue | Revenue | $ | 293,772 | | | 100.0 | % | | $ | 528,060 | | | 100.0 | % | Revenue | $ | 441,478 | | | 100.0 | % | | $ | 293,772 | | | 100.0 | % |
Cost of services | Cost of services | 228,536 | | | 77.8 | % | | 388,439 | | | 73.6 | % | Cost of services | 335,496 | | | 76.0 | % | | 228,536 | | | 77.8 | % |
Gross profit | Gross profit | 65,236 | | | 22.2 | % | | 139,621 | | | 26.4 | % | Gross profit | 105,982 | | | 24.0 | % | | 65,236 | | | 22.2 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | 49,247 | | | 16.8 | % | | 56,491 | | | 10.7 | % | Selling, general and administrative expenses | 64,458 | | | 14.6 | % | | 49,247 | | | 16.8 | % |
Amortization of intangible assets | Amortization of intangible assets | 7,875 | | | 2.6 | % | | 8,297 | | | 1.6 | % | Amortization of intangible assets | 7,512 | | | 1.7 | % | | 7,875 | | | 2.6 | % |
Income from operations | Income from operations | 8,114 | | | 2.8 | % | | 74,833 | | | 14.1 | % | Income from operations | 34,012 | | | 7.7 | % | | 8,114 | | | 2.8 | % |
Interest expense — net | Interest expense — net | (9,129) | | | (3.1) | % | | (11,723) | | | (2.2) | % | Interest expense — net | (9,580) | | | (2.2) | % | | (9,129) | | | (3.1) | % |
Income (loss) before income tax | Income (loss) before income tax | (1,015) | | | (0.3) | % | | 63,110 | | | 11.9 | % | Income (loss) before income tax | 24,432 | | | 5.5 | % | | (1,015) | | | (0.3) | % |
Income tax benefit (expense) | Income tax benefit (expense) | 1,374 | | | 0.4 | % | | (13,783) | | | (2.6) | % | Income tax benefit (expense) | (5,617) | | | (1.2) | % | | 1,374 | | | 0.4 | % |
Net income | Net income | $ | 359 | | | 0.1 | % | | $ | 49,327 | | | 9.3 | % | Net income | $ | 18,815 | | | 4.3 | % | | $ | 359 | | | 0.1 | % |
| Adjusted EBITDA (1) | Adjusted EBITDA (1) | $ | 60,025 | | | 20.4 | % | | $ | 105,885 | | | 20.1 | % | Adjusted EBITDA (1) | $ | 67,951 | | | 15.4 | % | | $ | 60,025 | | | 20.4 | % |
Adjusted income from operations (1) | Adjusted income from operations (1) | $ | 27,211 | | | 9.3 | % | | $ | 74,833 | | | 14.1 | % | Adjusted income from operations (1) | $ | 34,012 | | | 7.7 | % | | $ | 27,211 | | | 9.3 | % |
Adjusted net income (1) | Adjusted net income (1) | $ | 26,445 | | | 9.0 | % | | $ | 58,458 | | | 11.1 | % | Adjusted net income (1) | $ | 29,841 | | | 6.8 | % | | $ | 26,445 | | | 9.0 | % |
The following table sets forth statement of income data as a percentage of revenue for the six months ended June 30, 20202021 and 2019 (in thousands, except percentages):2020:
| | | | Six Months Ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | 2021 | | % | | 2020 | | % |
| | Six Months Ended June 30, | | | | | | | | | |
| | 2020 | | % | | 2019 | | % | | (In thousands, except percentages) |
Revenue | Revenue | $ | 800,095 | | | 100.0 | % | | $ | 1,029,818 | | | 100.0 | % | Revenue | $ | 832,318 | | | 100.0 | % | | $ | 800,095 | | | 100.0 | % |
Cost of services | Cost of services | 626,000 | | | 78.2 | % | | 763,250 | | | 74.1 | % | Cost of services | 644,978 | | | 77.5 | % | | 626,000 | | | 78.2 | % |
Gross profit | Gross profit | 174,095 | | | 21.8 | % | | 266,568 | | | 25.9 | % | Gross profit | 187,340 | | | 22.5 | % | | 174,095 | | | 21.8 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | 106,616 | | | 13.3 | % | | 112,366 | | | 10.9 | % | Selling, general and administrative expenses | 124,568 | | | 15.0 | % | | 106,616 | | | 13.3 | % |
Amortization of intangible assets | Amortization of intangible assets | 16,084 | | | 2.1 | % | | 16,459 | | | 1.6 | % | Amortization of intangible assets | 15,052 | | | 1.8 | % | | 16,084 | | | 2.1 | % |
Income from operations | Income from operations | 51,395 | | | 6.4 | % | | 137,743 | | | 13.4 | % | Income from operations | 47,720 | | | 5.7 | % | | 51,395 | | | 6.4 | % |
Interest expense — net | Interest expense — net | (19,335) | | | (2.4) | % | | (23,671) | | | (2.3) | % | Interest expense — net | (18,596) | | | (2.2) | % | | (19,335) | | | (2.4) | % |
Income before income tax | Income before income tax | 32,060 | | | 4.0 | % | | 114,072 | | | 11.1 | % | Income before income tax | 29,124 | | | 3.5 | % | | 32,060 | | | 4.0 | % |
Income tax expense | Income tax expense | (969) | | | (0.1) | % | | (22,703) | | | (2.2) | % | Income tax expense | (3,177) | | | (0.4) | % | | (969) | | | (0.1) | % |
Net income | Net income | $ | 31,091 | | | 3.9 | % | | $ | 91,369 | | | 8.9 | % | Net income | $ | 25,947 | | | 3.1 | % | | $ | 31,091 | | | 3.9 | % |
| | | | | | | | | | | | | | | | |
Adjusted EBITDA (1) | Adjusted EBITDA (1) | $ | 141,483 | | | 17.7 | % | | $ | 199,723 | | | 19.4 | % | Adjusted EBITDA (1) | $ | 114,247 | | | 13.7 | % | | $ | 141,483 | | | 17.7 | % |
Adjusted income from operations (1) | Adjusted income from operations (1) | $ | 76,165 | | | 9.5 | % | | $ | 138,176 | | | 13.4 | % | Adjusted income from operations (1) | $ | 47,720 | | | 5.7 | % | | $ | 76,165 | | | 9.5 | % |
Adjusted net income (1) | Adjusted net income (1) | $ | 70,091 | | | 8.8 | % | | $ | 106,270 | | | 10.3 | % | Adjusted net income (1) | $ | 43,696 | | | 5.2 | % | | $ | 70,091 | | | 8.8 | % |
(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 measures.
Three Months Ended June 30, 20202021 Compared to the Three Months Ended June 30, 20192020
Revenue. Revenue decreased $234.3increased by $147.7 million, or 44%50%, to $293.8$441.5 million for the three months ended June 30, 20202021 from $528.1$293.8 million for the same period in 2019.2020. The decrease was attributable to a decrease in tuitionfollowing table summarizes the revenue in our full service child care centers due to the continued temporary closureand percentage of a significant portiontotal revenue for each of our centers duringsegments for the three months ended June 30, 2020 in response to the COVID-19 pandemic. This decrease was partially offset by contributions from expanded sales2021 and utilization of our back-up care services, and to a lesser degree, contributions from our educational advisory services segment. 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2021 | | 2020 | | Change 2021 vs 2020 |
| | | | | | | | | | | |
| (In thousands, except percentages) |
Full-service center-based child care | $ | 334,427 | | | 75.7 | % | | $ | 137,306 | | | 46.7 | % | | $ | 197,121 | | | 143.6 | % |
Tuition | 298,065 | | | 89.1 | % | | 76,834 | | | 56.0 | % | | 221,231 | | | 287.9 | % |
Management fees and operating subsidies | 36,362 | | | 10.9 | % | | 60,472 | | | 44.0 | % | | (24,110) | | | (39.9) | % |
Back-up care | 81,484 | | | 18.5 | % | | 135,904 | | | 46.3 | % | | (54,420) | | | (40.0) | % |
Educational advisory and other services | 25,567 | | | 5.8 | % | | 20,562 | | | 7.0 | % | | 5,005 | | | 24.3 | % |
Total revenue | $ | 441,478 | | | 100.0 | % | | $ | 293,772 | | | 100.0 | % | | $ | 147,706 | | | 50.3 | % |
Revenue generated by the full service center-based child care segment in the three months ended June 30, 2020 decreased2021 increased by $301.3$197.1 million, or 69%144%, when compared to the same period in 2019. Approximately 2502020. Revenue growth in this segment was attributable to enrollment increases in our open child care centers were open duringand the quarter and we have resumed operations in another 160 centers in late May and June, resulting in 409 total centers operating as of June 30, 2020, as compared to 1,083 centers open as of June 30, 2019. As countries and local jurisdictions have lifted certain restrictions, we expect to continue the phasedcontinued re-opening of our temporarily closed centers. Tuition revenue increased by $221.2 million, or 288%, when compared to the prior year, on a 196% increase in enrollment. While enrollment in our child care centers and currently anticipate that more than 85% ofimproved during the quarter, our centers will re-open by September 30, 2020. This timing may change as we continue to evaluate local conditions and factors governing opening decisions. In the second quarter of 2020, we made the determination not to re-open 18 center locations,operate below pre-COVID-19 enrollment levels during this re-ramping phase and we may decide not to re-open additional centers in locations where demand and economic trends have shifted; in addition, we cannot anticipate how long it will take for re-opened centers to reach typicalexpect enrollment levels. Therefore, we expect to see the effects of COVID-19recovery to continue throughout 2021. Higher foreign currency exchange rates for our United Kingdom and Netherlands operations also contributed to adversely impactour revenue growth, which increased 2021 tuition revenue by approximately 4%, or $5.0 million. Management fees and operating subsidies from employer sponsors decreased $24.1 million, or 40%, due to reduced operating subsidies received to support center operations in connection with the results of operations for the remainder of 2020, and potentiallyincrease in future periods.tuition revenue.
Revenue generated by the back-up care segmentservices in the three months ended June 30, 2020 increased2021 decreased by $65.9$54.4 million, or 94%40%, when compared to the same period in 2019. Revenue growth in the back-up care segment was primarily attributable to2020. While we had gains from expanded sales andto new clients, increased utilization from new and existing clients, dueand increases in traditional in-center and in-home use during the quarter, back-up care revenue decreased compared to unprecedentedthe prior year as the second quarter in 2020 benefited from significant demand for our back-up care services (in particular,(primarily for self-sourced reimbursed care) as clients and families pursued additional innovative coverage and supports as a result of continued business and school closures. Although self-sourced reimbursed care offered an important alternative to clients and families during the early stages of the pandemic and through the second quarter of 2020, we expect that demand for back-upwhen other care will return to the traditionalalternatives were not available. Traditional in-center and in-home service delivery in the second half of 2020, as more centers resume operations, as businessesuse continues to ramp and, schools re-open, and as clients and families continue to adapt to new conditions. Lastly, revenuealthough usage remains below pre-COVID-19 levels, we expect continued recovery throughout 2021.
Revenue generated by educational advisory and other services in the three months ended June 30, 20202021 increased by $1.1$5.0 million, or 6%24%, when compared to the same period in the prior year. Revenue growth in the educational advisory servicesthis segment iswas primarily attributable to expandedcontributions from sales to new clients and increased utilization and contributions from anexisting clients. An acquisition completed in 2020 contributed $2.3 million to the fourth quartergrowth of 2019.this segment in 2021.
Cost of Services. Cost of services decreased $159.9increased by $107.0 million, or 41%47%, to $228.5$335.5 million for the three months ended June 30, 20202021 from $388.4$228.5 million for the same period in 2019. 2020.
Cost of services in the full service center-based child care segment decreased $163.4increased $105.5 million, or 48%60%, to $175.0$280.5 million in the three months ended June 30, 20202021 when compared to the same period in 2019.2020. The decreaseincrease in cost of services iswas primarily associated with the temporary center closures and related proportional reductionsa 125% increase in personnel costs, aswhich generally represent 70% of the costs for this segment, in connection with the enrollment growth at our centers. The increase in cost of services was partially offset by a result3% decrease in program supplies, materials, and facility costs, which generally represent the remaining 30% of employees that were furloughed and contributionscosts for this segment, primarily due to funding from government assistancesupport programs thatwhich reduced other operating expenses by $7.4 million in the second quarter of 2021. The second quarter of 2020 included a reduction in certain payroll costs, as well as program supplies and materials that decreased in proportion to closed centers. These reductions in costs wereother operating expenses of $39.6 million from funding received from government support programs, which was partially offset by impairment costs of $11.9 million for long-lived assets incurred as a result of the impact of COVID-19 on operations,and center closure costs associated with the permanent closure of certain centers of $4.4 million including related severance and facilities costs, and incremental occupancy costs associated with centers that have been added since June 30, 2019. did not occur in 2021.
Cost of services in the back-up care segment increased $2.4decreased by $0.7 million, or 6%2%, to $43.2$42.5 million in the three months ended June 30, 2021, when compared to the prior year. Cost of services in the second quarter of 2020 primarily dueincluded impairment costs of $2.1 million related to personnel costsan equity investment. After taking these charges into account, cost of services increased $1.4 million, or 4%, in the three months ended June 30, 2021, associated with the effects of a change in the revenue mix, with the return to higher levels of traditional in-center and in-home care in the current period compared to more significant self-sourced reimbursed care in the prior year period. The increase in traditional utilization levels over the prior year generated increased care provider fees associated within the services providedthree months ended June 30, 2021, and we continue to the expanding customer base and increased utilization, as well asinvest in personnel, marketing and technology spending to support our customer user experience and service delivery, and impairment costs incurred due to the impactdelivery.
Cost of services in the educational advisory and other services segment increased $1.1by $2.2 million, or 11%21%, to $10.3$12.5 million in the three months ended June 30, 20202021 when compared to the prior year, which is broadly consistent with the revenue growth. The increase was primarily due to personnel costs related to delivering services to the expanding customer base.
Gross Profit. Gross profit decreased $74.4increased by $40.7 million, or 53%62%, to $65.2$106.0 million for the three months ended June 30, 20202021 from $139.6$65.2 million for the same period in 2019.2020. Gross profit margin as a percentagewas 24% of revenue was 22% for the three months ended June 30, 2020, and decreased2021, an increase of approximately 4%2% from the three months ended June 30, 2019.2020. The decrease isincrease was primarily due to reducedimproved margins in the full service center-based child care segment from the temporary closure ofenrollment increases at open centers and related impairment charges on long-lived assets,from the re-opening of temporarily closed child care centers, partially offset by increases in gross profitreduced contributions from expandedour back-up care services.services as a result of the decrease in self-sourced reimbursed care.
Selling, General and Administrative Expenses (“SGA”). SGA decreased $7.3increased by $15.2 million, or 13%31%, to $49.2$64.5 million for the three months ended June 30, 2020 compared to $56.52021 from $49.2 million for the same period in 2019,2020, in order to support the business throughout the pandemic and as a result of cost reduction efforts, including from the furlough of support personnel in connection with temporary center closures.it re-ramps. SGA was 17%15% of revenue for the three months ended June 30, 2020, an increase from 11%2021, compared to 17% for the same period in 20192020 due to the lower revenue base.base in 2020.
Amortization of Intangible Assets. Amortization expense on intangible assets was $7.5 million for the three months ended June 30, 2021, a decrease from $7.9 million for the three months ended June 30, 2020, a decrease from $8.3 million for the three months ended June 30, 2019, due to decreases from certain intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2019.2020 and 2021.
Income from Operations. Income from operations decreasedincreased by $66.7$25.9 million, or 89%319%, to $8.1$34.0 million for the three months ended June 30, 20202021 when compared to the same period in 2019. Incomeprior year. The following table summarizes income from operations was 3%and percentage of revenue for each of our segments for the three months ended June 30, 2020, compared to 14% for the three months ended June 30, 2019. 2021 and 2020:
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| Three Months Ended June 30, | | | | |
| 2021 | | 2020 | | Change 2021 vs 2020 |
| | | | | | | | | | | |
| (In thousands, except percentages) |
Full-service center-based child care | $ | 4,062 | | | 1.2 | % | | $ | (71,842) | | | (52.3) | % | | $ | 75,904 | | | 105.7 | % |
Back-up care | 24,769 | | | 30.4 | % | | 75,121 | | | 55.3 | % | | (50,352) | | | (67.0) | % |
Educational advisory and other services | 5,181 | | | 20.3 | % | | 4,835 | | | 23.5 | % | | 346 | | | 7.2 | % |
Income from operations | $ | 34,012 | | | 7.7 | % | | $ | 8,114 | | | 2.8 | % | | $ | 25,898 | | | 319.2 | % |
The decreaseincrease in income from operations was due to the following:
•Income from operations for the full service center-based child care segment decreased $123.7increased $75.9 million, or 239%106%, in the three months ended June 30, 20202021 when compared to the same period in 20192020 primarily due to reduced marginsincreases in tuition revenue from enrollment growth in our open centers and the temporary center closures and related impairment charges on long-lived assetsre-opening of $11.9 million,temporarily closed centers, as well as costs associated withcontributions from government support programs that reduced certain operating expenses by $7.4 million during the permanent closurequarter. Income from operations for the three months ended June 30, 2020 included contributions from government support programs of certain centers of $4.4 million. These reductions$39.6 million, which were partially offset by decreases in overheadimpairment costs as a result of cost reduction efforts, including from the furlough$11.9 million and center closure costs of support personnel in connection with center closures.$4.4 million.
•Income from operations for the back-up care segment increased $56.7decreased $50.4 million, or 308%67%, in the three months ended June 30, 20202021 when compared to the same period in 2019 due to expanded sales and utilization2020, as the second quarter of our back-up care services (in particular, for self-sourced reimbursed care) as clients and families pursued additional supports as a result2020 benefited from increased demand during the early stages of business and school closures, partially offset by investments in technology to support our customer user experience and service delivery and increased care provider fees associated with the incremental revenue.pandemic.
•Income from operations for the educational advisory and other services segment increased 6%$0.3 million, or 7%, in the three months ended June 30, 20202021 when compared withto the same period in 20192020 due to contributions from the expanding revenue base.
Net Interest Expense. Net interest expense decreased to $9.1was $9.6 million for the three months ended June 30, 2020 from $11.72021, which is relatively consistent with interest expense of $9.1 million for the same period in 2019,2020. Including the effects of the interest rate swap arrangements, the weighted average interest rates for the term loan and revolving credit facility were 3.1% for both the three months ended June 30, 2021 and 2020. Based on our current interest rate projections, we estimate that our overall weighted average interest rate will approximate 3.0% for the remainder of 2021.
Income Tax Expense (Benefit).We recorded income tax expense of $5.6 million during the three months ended June 30, 2021, at an effective income tax rate of 23%, compared to an income tax benefit of $1.4 million during the three months ended June 30, 2020, at an effective income tax rate of (135)%. The difference between the effective income tax rate as compared to the statutory income tax rate was primarily due to the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock, which had a more significant impact to the effective tax rate for 2020 due to the lower income before income tax. 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 the settlement of foreign, federal and state tax issues and the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock. During the three months ended June 30, 2021 and 2020, the excess tax benefits reduced income tax expense by $1.2 million and $1.7 million, respectively. The effective income tax rate prior to the inclusion of the excess tax benefits from stock-based compensation and other discrete items was approximately 28% and 29% for the three months ended June 30, 2021 and 2020, respectively.
Adjusted EBITDA and Adjusted Income from Operations.Adjusted EBITDA and adjusted income from operations increased $7.9 million, or 13%, and $6.8 million, or 25%, respectively, for the three months ended June 30, 2021 over the comparable period in 2020 primarily as a result of the increase in gross profit in the full service center-based child care segment, partially offset by reduced contributions in the back-up care segment.
Adjusted Net Income.Adjusted net income increased $3.4 million, or 13%, for the three months ended June 30, 2021 when compared to the same period in 2020, primarily due to the increase in income from operations, partially offset by a higher effective tax rate.
Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020
Revenue.Revenue increased $32.2 million, or 4%, to $832.3 million for the six months ended June 30, 2021 from $800.1 million for the same period in 2020. The following table summarizes the revenue and percentage of total revenue for each of our segments for the six months ended June 30, 2021 and 2020:
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| Six Months Ended June 30, | | | | |
| 2021 | | 2020 | | Change 2021 vs 2020 |
| | | | | | | | | | | |
| (In thousands, except percentages) |
Full-service center-based child care | $ | 624,746 | | | 75.0 | % | | $ | 548,697 | | | 68.5 | % | | $ | 76,049 | | | 13.9 | % |
Tuition | 548,317 | | | 87.8 | % | | 449,713 | | | 82.0 | % | | 98,604 | | | 21.9 | % |
Management fees and operating subsidies | 76,429 | | | 12.2 | % | | 98,984 | | | 18.0 | % | | (22,555) | | | (22.8) | % |
Back-up care | 157,839 | | | 19.0 | % | | 210,071 | | | 26.3 | % | | (52,232) | | | (24.9) | % |
Educational advisory and other services | 49,733 | | | 6.0 | % | | 41,327 | | | 5.2 | % | | 8,406 | | | 20.3 | % |
Total revenue | $ | 832,318 | | | 100.0 | % | | $ | 800,095 | | | 100.0 | % | | $ | 32,223 | | | 4.0 | % |
Revenue generated by the full service center-based child care segment in the six months ended June 30, 2021 increased by $76.0 million, or 14%, when compared to the same period in 2020. Revenue growth in this segment was attributable to enrollment increases in our open centers and the continued re-opening of our temporarily closed centers. Tuition revenue increased by $98.6 million, or 22%, when compared to the prior year, on a 13% increase in enrollment. As noted above, while enrollment in our child care centers has improved, we remain in the re-ramp phase and enrollment remains below pre-COVID-19 levels. We expect recovery to continue throughout 2021. Higher foreign currency exchange rates for our United Kingdom and Netherlands operations also contributed to our revenue growth, which increased 2021 tuition revenue by approximately 3%, or $15.0 million. Management fees and operating subsidies from employer sponsors decreased $22.6 million, or 23%, due to reduced operating subsidies received to support center operations in connection with the increase in tuition revenue.
Revenue generated by back-up care services in the six months ended June 30, 2021 decreased by $52.2 million, or 25%, when compared to the same period in 2020. While we had gains from expanded sales to new clients, increased utilization from existing clients, and increases in traditional in-center and in-home use in the 2021 year to date period, back-up care revenue decreased compared to the prior year as the second quarter in 2020 benefited from significant demand for back-up care services (primarily for self-sourced reimbursed care) during the early stages of the pandemic when other care alternatives were not available. As noted above, traditional in-center and in-home use continues to ramp, and, although usage remains below pre-COVID-19 levels, we expect continued recovery throughout 2021.
Revenue generated by educational advisory and other services in the six months ended June 30, 2021 increased by $8.4 million, or 20%, 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. An acquisition completed in 2020 contributed $4.3 million to the growth of this segment in 2021.
Cost of Services.Cost of services increased $19.0 million, or 3%, to $645.0 million for the six months ended June 30, 2021 from $626.0 million for the same period in 2020.
Cost of services in the full service center-based child care segment increased $20.2 million, or 4%, to $541.7 million in the six months ended June 30, 2021 when compared to the same period in 2020. The increase in cost of services was primarily associated with the revenue increase. Funding from government support programs reduced certain operating expenses by $17.0 million in 2021. Cost of services in 2020 included a reduction in certain payroll and operating expenses of $39.6 million from funding received from government support programs, partially offset by impairment costs of $16.9 million and center closure costs of $4.4 million that did not occur in 2021.
Cost of services in the back-up care segment decreased $4.6 million, or 5%, to $78.8 million in the six months ended June 30, 2021, when compared to the prior year. Cost of services for the six months ended June 30, 2020 included impairment costs of $2.1 million related to an equity investment. After taking these charges into account, cost of services decreased $2.5 million, or 3%, in the six months ended June 30, 2021, associated with the revenue decrease, partially offset by the effects of a change in the revenue mix, with the return to higher levels of traditional in-center and in-home care in the current period compared to more significant self-sourced reimbursed care in the prior year period. The increase in traditional utilization levels over the prior year generated increased care provider fees in the six months ended June 30, 2021, and we continue to invest in personnel, marketing and technology to support our customer user experience and service delivery.
Cost of services in the educational advisory and other services segment increased by $3.4 million, or 16%, to $24.5 million in the six months ended June 30, 2021 due to personnel costs related to delivering services to the expanding customer base.
Gross Profit.Gross profit increased $13.2 million, or 8%, to $187.3 million for the six months ended June 30, 2021 from $174.1 million for the same period in 2020. Gross profit margin was 23% of revenue for the six months ended June 30, 2021, an increase of approximately 1% from the six months ended June 30, 2020. The increase was primarily due to improved margins in the full service center-based child care segment from enrollment increases at open centers and from the re-opening of temporarily closed child care centers, partially offset by reduced contributions from our back-up care services as a result of the decrease in self-sourced reimbursed care.
Selling, General and Administrative Expenses.SGA increased $18.0 million, or 17%, to $124.6 million for the six months ended June 30, 2021 from $106.6 million for the same period in 2020, in order to support the business throughout the pandemic and as it re-ramps. SGA was 15% of revenue for the six months ended June 30, 2021, compared to 13% for the same period in 2020.
Amortization of Intangible Assets.Amortization expense on intangible assets was $15.1 million for the six months ended June 30, 2021, a decrease from $16.1 million for the six months ended June 30, 2020 due to decreases from certain intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2020 and 2021.
Income from Operations.Income from operations decreased by $3.7 million, or 7%, to $47.7 million for the six months ended June 30, 2021 when compared to the same period in 2020. The following table summarizes income from operations and percentage of revenue for each of our segments for the six months ended June 30, 2021 and 2020:
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| Six Months Ended June 30, | | | | |
| 2021 | | 2020 | | Change 2021 vs 2020 |
| | | | | | | | | | | |
| (In thousands, except percentages) |
Full-service center-based child care | $ | (13,905) | | | (2.2) | % | | $ | (55,095) | | | (10.0) | % | | $ | 41,190 | | | 74.8 | % |
Back-up care | 51,959 | | | 32.9 | % | | 97,360 | | | 46.3 | % | | (45,401) | | | (46.6) | % |
Educational advisory and other services | 9,666 | | | 19.4 | % | | 9,130 | | | 22.1 | % | | 536 | | | 5.9 | % |
Income from operations | $ | 47,720 | | | 5.7 | % | | $ | 51,395 | | | 6.4 | % | | $ | (3,675) | | | (7.2) | % |
The decrease in income from operations was due to the following:
•Income from operations for the full service center-based child care segment increased $41.2 million, or 75%, in the six months ended June 30, 2021 when compared to the same period in 2020 primarily due to increases in tuition revenue from enrollment growth in our open centers and the re-opening of temporarily closed centers, as well as contributions from government support programs that reduced certain payroll and operating expenses by $17.0 million in 2021. Income from operations for the six months ended June 30, 2020, included contributions from government support programs of $39.6 million, which were partially offset by impairment costs of $16.9 million and center closure costs of $4.4 million.
•Income from operations for the back-up care segment decreased $45.4 million, or 47%, in the six months ended June 30, 2021 when compared to the same period in 2020, as the second quarter of 2020 benefited from increased demand during the early stages of the pandemic.
•Income from operations for the educational advisory and other services segment increased $0.5 million, or 6%, in the six months ended June 30, 2021 when compared to the same period in 2020 due to contributions from the expanding revenue base.
Net Interest Expense.Net interest expense decreased to $18.6 million for the six months ended June 30, 2021 from $19.3 million for the same period in 2020, due to decreased borrowings onunder our revolving credit facility as well as decreases in the interest rates applicable to our debt. Including the effects of the interest rate swap arrangements, the weighted average interest rates for the term loansloan and revolving credit facility were 3.1% and 3.9% for the three months ended June 30, 2020 and 2019, respectively. Based on our current interest rate projections, we estimate that our overall weighted average interest rate will approximate 3.0% for the remainder of 2020.
Income Tax Expense. We recorded an income tax benefit of $1.4 million during the three months ended June 30, 2020, at an effective income tax rate of (135)%, compared to income tax expense of $13.8 million during the three months ended June 30, 2019, at an effective income tax rate of 22%. For the three months ended June 30, 2020, our annual effective tax rate was highly sensitive to change in estimates of total ordinary income (loss) and therefore a reliable estimate could not be made. Accordingly, the actual effective tax rate for the year-to-date period has been used. The difference between the effective income tax rates as compared to the statutory income tax rates is primarily due to the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock. During the three months ended June 30, 2020 and 2019, the excess tax benefits reduced income tax expense by $1.7 million and $2.8 million, respectively. The effective income tax rate would have approximated 29% and 26% for the three months ended June 30, 2020 and 2019, respectively, prior to the inclusion of the excess tax benefits from stock-based compensation.
Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations decreased $45.9 million, or 43%, and $47.6 million, or 64%, respectively, for the three months ended June 30, 2020 over the comparable period in 2019 primarily as a result of the decrease in gross profit in the full service center-based child care segment, partially offset by growth in the back-up care segment and certain cost reductions in SGA.
Adjusted Net Income. Adjusted net income decreased $32.0 million, or 55%, for the three months ended June 30, 2020 when compared to the same period in 2019, primarily due to the decrease in income from operations, partially offset by a lower effective tax rate.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
Revenue. Revenue decreased $229.7 million, or 22%, to $0.8 billion3.3% for the six months ended June 30, 2021 and 2020, from $1.0 billion for the same period in 2019. The decrease was attributable to a decrease in tuition revenue in our full service child care centers due to the temporary closure of a significant portion of our centers in March 2020 as a result of required school and business closures and shelter-in-place mandates in response to the COVID-19 pandemic. The decreases were offset by contributions from expanded sales and utilization of our back-up care and educational advisory services, as well as new and ramping full service child care and early education centers and typical annual tuition and price increases in the range of 3% to 4% prior to the temporary closure of centers. Revenue generated by the full service center-based child care segment in the six months ended June 30, 2020 decreased by $308.2 million, or 36%, when compared to the same period in 2019, due to the temporary closure of centers.
Revenue generated by back-up care services in the six months ended June 30, 2020 increased by $75.3 million, or 56%, when compared to the same period in 2019. Revenue growth in the back-up care segment was primarily attributable to expanded sales and increased utilization from new and existing clients due to unprecedented demand for our back-up care services (in particular, for self-sourced reimbursed care) as clients and families pursued additional innovative coverage and supports as a result of continued business and school closures. Although self-sourced reimbursed care offered an important alternative to clients and families during the early stages of the pandemic and through the second quarter of 2020, we expect that demand for back-up care will return to the traditional in-center and in-home service delivery in the second half of 2020 as more centers resume operations, as businesses and schools re-open, and as clients and families continue to adapt to new conditions. Lastly, revenue generated by educational advisory services in the six months ended June 30, 2020 increased by $3.2 million, or 8%, when compared to the same period in the prior year. Revenue growth in the educational advisory services segment is primarily attributable to expanded sales, increased utilization and contributions from an acquisition completed in the fourth quarter of 2019.
Cost of Services. Cost of services decreased $137.3 million, or 18%, to $0.6 billion for the six months ended June 30, 2020 from $0.8 billion for the same period in 2019. Cost of services in the full service center-based child care segment decreased $145.3 million, or 22%, to $521.5 million in the six months ended June 30, 2020 when compared to the same period in 2019. The decrease in cost of services is primarily associated with the temporary center closures and related proportional reductions in personnel costs as a result of employees that were furloughed and contributions from government assistance programs that reduced certain payroll costs, as well as program supplies and materials that also decreased in proportion to closed centers. These reductions in costs were partially offset by personnel and program cost increases associated with enrollment increases, routine wage and benefit cost increases, and costs associated with new centers added since June 30, 2019 incurred prior to the temporary closures of centers, as well as incremental occupancy costs associated with centers that have been added since June 30, 2019, impairment costs of $16.9 million for long-lived assets incurred as a result of the impact of COVID-19 on operations, and costs associated with the permanent closure of certain centers of $4.4 million, including related severance and facilities costs. Cost of services in the back-up care segment increased $5.2 million, or 7%, to $83.3 million in the six months ended June 30, 2020, primarily due to personnel costs and increased care provider fees associated with the services provided to the expanding customer base and increased utilization, as well as marketing and technology spending to support our customer user experience and service delivery, and impairment costs incurred due to the impact of COVID-19 of $2.1 million related to an equity investment. Cost of services in the educational advisory services segment increased by $2.8 million, or 15%, to $21.2 million in the six months ended June 30, 2020 due to personnel costs related to delivering services to the expanding customer base.respectively.
Gross Profit. Income Tax Expense.Gross profit decreased $92.5 million, or 35%, to $174.1We recorded income tax expense of $3.2 million for the six months ended June 30, 2020 from $266.6 million for the same period in 2019. Gross profit margin as a percentage2021 at an effective income tax rate of revenue was 22% for the six months ended June 30, 2020, and decreased approximately 4% from the six months ended June 30, 2019. The decrease is primarily due to reduced margins in the full service center-based child care segment from the temporary closure of centers and related impairment charges on long-lived assets, partially offset by increases in gross profit from expanded back-up care services.
Selling, General and Administrative Expenses. SGA decreased $5.8 million, or 5%11%, to $106.6 million for the six months ended June 30, 2020 compared to $112.4 million for the same period in 2019 as a result of cost reduction efforts, including from the furlough of support personnel in connection with temporary center closures. SGA was 13% of revenue for the six months ended June 30, 2020, an increase from 11% for the same period in 2019 due to the lower revenue base. SGA decreased over the comparable 2019 period due to decreases in personnel costs and discretionary costs such as travel.
Amortization of Intangible Assets. Amortization expense on intangible assets was $16.1 million for the six months ended June 30, 2020, a decrease from $16.5 million for the six months ended June 30, 2019 due to decreases from certain intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2019.
Income from Operations. Income from operations decreased by $86.3 million, or 63%, to $51.4 million for the six months ended June 30, 2020 when compared to the same period in 2019. Income from operations was 6% of revenue for the six months ended June 30, 2020, a decrease of approximately 7% compared to the six months ended June 30, 2019. The decrease in income from operations was due to the following:
•Income from operations for the full service center-based child care segment decreased $148.5 million, or 159%, in the six months ended June 30, 2020 when compared to the same period in 2019 due to reduced margins from the temporary center closures and related impairment charges on long lived assets of $16.9 million, as well as costs associated with the permanent closure of certain centers of $4.4 million. These reductions were partially offset by decreases in overhead costs as a result of cost reduction efforts, including from the furlough of support personnel in connection with center closures, and tuition increases and enrollment gains over the prior year prior to COVID-19, and contributions from new centers added since June 30, 2019, prior to the temporary center closures
•Income from operations for the back-up care segment increased $61.8 million, or 174%, in the six months ended June 30, 2020 when compared to the same period in 2019 due to the expanding revenue base from increased sales and utilization of our back-up care services (in particular, for self-sourced reimbursed care) as clients and families pursued additional supports as a result of business and school closures, partially offset by investments in technology to support our customer user experience and service delivery, and increased care provider fees associated with the incremental revenue.
•Income from operations for the educational advisory services segment increased $0.3 million, or 3%, for the six months ended June 30, 2020 when compared to the same period in 2019 due to contributions from the expanding revenue base.
Net Interest Expense. Net interest expense decreased to $19.3 million for the six months ended June 30, 2020 from $23.7 million for the same period in 2019. The decrease in interest expense relates to decreased borrowings under our revolving credit facility. Including the effects of the interest rate swap arrangements, the weighted average interest rates for the term loans and revolving credit facility were 3.3% and 4.0% for the six months ended June 30, 2020 and 2019, respectively.
Income Tax Expense. We recorded an income tax expense of $1.0 million forduring the six months ended June 30, 2020, at an effective income tax rate of 3.0%, compared to income tax expense of $22.7 million during the six months ended June 30, 2019, at an effective income tax rate of 20%3%. For the six months ended June 30, 2020, our annual effective tax rate was highly sensitive to change in estimates of total ordinary income (loss) and therefore a reliable estimate could not be made. Accordingly, the actual effective tax rate for the year-to-date period has been used. The difference between the effective income tax rates as compared to the statutory income tax rates was primarily due to the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock. During the six months ended June 30, 20202021 and 20192020 the excess tax benefit decreased income tax expense by $8.6$5.1 million and $7.4$8.6 million, respectively. 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, variousvaluation allowances, jurisdictional income tax rate changes, as well as discrete items such as the settlement of foreign, federal and state tax issues and the effects of excess tax benefits associated with the exercise of stock options and vesting of restricted stock. The effective income tax rate would have approximated 29%28% and 26%29% for the six months ended June 30, 20202021 and 2019,2020, respectively, prior to the inclusion of the excess tax benefit from stock-based compensation.compensation and other discrete items.
Adjusted EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations decreased $58.2$27.2 million, or 29%19%, and $62.0$28.4 million, or 45%37%, respectively, for the six months ended June 30, 20202021 over the comparable period in 20192020 primarily as a result of the decrease in gross profit in the full-service center-based childback-up care segment, partially offset by growth in the back-up care segment.full service center-based child care.
Adjusted Net Income. Adjusted net income decreased $36.2$26.4 million, or 34%38%, for the six months ended June 30, 20202021 when compared to the same period in 2019,2020, primarily due to the decrease in income from operations partially offset byand a lowerhigher 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):follows:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2021 | | 2020 |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | (In thousands, except share data) |
Net income | Net income | $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
Interest expense — net | Interest expense — net | 9,129 | | | 11,723 | | | 19,335 | | | 23,671 | | Interest expense — net | 9,580 | | | 9,129 | | | 18,596 | | | 19,335 | |
Income tax expense (benefit) | Income tax expense (benefit) | (1,374) | | | 13,783 | | | 969 | | | 22,703 | | Income tax expense (benefit) | 5,617 | | | (1,374) | | | 3,177 | | | 969 | |
Depreciation | Depreciation | 19,784 | | | 18,588 | | | 39,796 | | | 36,888 | | Depreciation | 20,598 | | | 19,784 | | | 40,340 | | | 39,796 | |
Amortization of intangible assets (a) | Amortization of intangible assets (a) | 7,875 | | | 8,297 | | | 16,084 | | | 16,459 | | Amortization of intangible assets (a) | 7,512 | | | 7,875 | | | 15,052 | | | 16,084 | |
EBITDA | EBITDA | 35,773 | | | 101,718 | | | 107,275 | | | 191,090 | | EBITDA | 62,122 | | | 35,773 | | | 103,112 | | | 107,275 | |
Additional Adjustments: | | |
Additional adjustments: | | Additional adjustments: | |
COVID-19 related costs (b) | COVID-19 related costs (b) | 18,436 | | | — | | | 23,406 | | | — | | COVID-19 related costs (b) | — | | | 18,436 | | | — | | | 23,406 | |
Stock-based compensation expense (c) | Stock-based compensation expense (c) | 5,155 | | | 4,512 | | | 9,438 | | | 7,618 | | Stock-based compensation expense (c) | 5,829 | | | 5,155 | | | 11,135 | | | 9,438 | |
Other costs (d) | Other costs (d) | 661 | | | — | | | 1,364 | | | 433 | | Other costs (d) | — | | | 661 | | | — | | | 1,364 | |
Non-cash operating lease expense (e) | — | | | (345) | | | — | | | 582 | | |
| Total adjustments | Total adjustments | 24,252 | | | 4,167 | | | 34,208 | | | 8,633 | | Total adjustments | 5,829 | | | 24,252 | | | 11,135 | | | 34,208 | |
Adjusted EBITDA | Adjusted EBITDA | $ | 60,025 | | | $ | 105,885 | | | $ | 141,483 | | | $ | 199,723 | | Adjusted EBITDA | $ | 67,951 | | | $ | 60,025 | | | $ | 114,247 | | | $ | 141,483 | |
| Income from operations | Income from operations | $ | 8,114 | | | $ | 74,833 | | | $ | 51,395 | | | $ | 137,743 | | Income from operations | $ | 34,012 | | | $ | 8,114 | | | $ | 47,720 | | | $ | 51,395 | |
COVID-19 related costs (b) | COVID-19 related costs (b) | 18,436 | | | — | | | 23,406 | | | — | | COVID-19 related costs (b) | — | | | 18,436 | | | — | | | 23,406 | |
Other costs (d) | Other costs (d) | 661 | | | — | | | 1,364 | | | 433 | | Other costs (d) | — | | | 661 | | | — | | | 1,364 | |
Adjusted income from operations | Adjusted income from operations | $ | 27,211 | | | $ | 74,833 | | | $ | 76,165 | | | $ | 138,176 | | Adjusted income from operations | $ | 34,012 | | | $ | 27,211 | | | $ | 47,720 | | | $ | 76,165 | |
| Net income | Net income | $ | 359 | | | $ | 49,327 | | | $ | 31,091 | | | $ | 91,369 | | Net income | $ | 18,815 | | | $ | 359 | | | $ | 25,947 | | | $ | 31,091 | |
Income tax expense (benefit) | Income tax expense (benefit) | (1,374) | | | 13,783 | | | 969 | | | 22,703 | | Income tax expense (benefit) | 5,617 | | | (1,374) | | | 3,177 | | | 969 | |
Income (loss) before income tax | Income (loss) before income tax | (1,015) | | | 63,110 | | | 32,060 | | | 114,072 | | Income (loss) before income tax | 24,432 | | | (1,015) | | | 29,124 | | | 32,060 | |
Amortization of intangible assets (a) | Amortization of intangible assets (a) | 7,875 | | | 8,297 | | | 16,084 | | | 16,459 | | Amortization of intangible assets (a) | 7,512 | | | 7,875 | | | 15,052 | | | 16,084 | |
COVID-19 related costs (b) | COVID-19 related costs (b) | 18,436 | | | — | | | 23,406 | | | — | | COVID-19 related costs (b) | — | | | 18,436 | | | — | | | 23,406 | |
Stock-based compensation expense (c) | Stock-based compensation expense (c) | 5,155 | | | 4,512 | | | 9,438 | | | 7,618 | | Stock-based compensation expense (c) | 5,829 | | | 5,155 | | | 11,135 | | | 9,438 | |
Other costs (d) | Other costs (d) | 661 | | | — | | | 1,364 | | | 433 | | Other costs (d) | — | | | 661 | | | — | | | 1,364 | |
Adjusted income before income tax | Adjusted income before income tax | 31,112 | | | 75,919 | | | 82,352 | | | 138,582 | | Adjusted income before income tax | 37,773 | | | 31,112 | | | 55,311 | | | 82,352 | |
Adjusted income tax expense (f) | (4,667) | | | (17,461) | | | (12,261) | | | (32,312) | | |
Adjusted income tax expense (e) | | Adjusted income tax expense (e) | (7,932) | | | (4,667) | | | (11,615) | | | (12,261) | |
Adjusted net income | Adjusted net income | $ | 26,445 | | | $ | 58,458 | | | $ | 70,091 | | | $ | 106,270 | | Adjusted net income | $ | 29,841 | | | $ | 26,445 | | | $ | 43,696 | | | $ | 70,091 | |
| Weighted average common shares outstanding — diluted | Weighted average common shares outstanding — diluted | 60,266,102 | | | 58,939,763 | | | 59,572,444 | | | 58,846,073 | | Weighted average common shares outstanding — diluted | 61,106,792 | | | 60,266,102 | | | 61,216,383 | | | 59,572,444 | |
Diluted adjusted earnings per common share | Diluted adjusted earnings per common share | $ | 0.44 | | | $ | 0.99 | | | $ | 1.18 | | | $ | 1.81 | | Diluted adjusted earnings per common share | $ | 0.49 | | | $ | 0.44 | | | $ | 0.71 | | | $ | 1.18 | |
(a)Represents amortization of intangible assets, including quarterly amortization expense of $5.0 million and $4.7 million for the three months ended June 30, 2020 and 2019, respectively, and $10.0 million and $9.4 million for the six months ended June 30, 2020 and 2019, respectively, associated with intangible assets recorded in connection with our going private transaction in May 2008.
(b)COVID-19 related costs in 2020 represent impairment costs for investments and long-lived assets as a result of center closures and investments,decreases in the fair values for certain centers that were open or temporarily closed, and other costs associated with the closure of centers incurred as a result of the impact of COVID-19 on our operations.operations and related management actions. For the three months ended June 30, 2020, impairment costs totaled $14.0 million, of which $11.9 million related to the full service center-based child care segment and $2.1 million related to the back-up care segment, and for the six months ended June 30, 2020, impairment costs totaled $19.0 million, of which $16.9 million related to the full service center-based child care segment, and $2.1 million related to the back-up care segment. Costs associated with the closure of centersOther COVID-19 related costs totaled $4.4 million for the three and six months ended June 30, 2020, and related towere primarily associated with the closure of centers, including severance and facilities costs.
(c)Represents non-cash stock-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation.
(d)Other costs in the three and six months ended June 30, 2020 relate to occupancy costs incurred for our new corporate headquarters during the construction period, which representrepresented duplicative corporate office costs in 2020 while we also continuecontinued to carry the costs for our existingprevious corporate headquarters. Other costs in the six months ended June 30, 2019 relate to transaction costs incurred in connection with completed acquisitions.
(e)Represents the excess of lease expense over cash lease expense (for periods prior to 2020).
(f)Represents income tax expense calculated on adjusted income before income tax at an effective tax rate of approximately 21% and 15% for 2021 and 23% for 2020, and 2019, respectively. The tax rate for 20202021 represents a tax rate of approximately 30%27% applied to the expected adjusted income before income tax, less the estimated effect of excess tax benefits related to equity transactions. However, the jurisdictional mix of the expected adjusted income before income tax for the full year, and the timing and volume of the tax benefits associated with such future equity activity 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.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, the excess of lease expense over cash lease expense (prior to fiscal 2020), stock-based compensation expense, impairment costs including theand other costs incurred due to the impact of COVID-19, and transactionincluding center closing costs, and other nonrecurring costs, such as duplicative corporate office costs and center closing costs. 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 not be evaluated in isolation or supplant comparable GAAP measures, but rather, 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
The COVID-19 pandemic has substantially disrupted our global operations and we are in a fluid and continuously changing environment. The broad effects of COVID-19, its duration and full impact to our operations are difficult to predict, due in large part to the interdependence of our operations with the operating decisions and requirements of our client partners and government authorities, which impact the timing and cadence of center re-openings and re-ramping of enrollment. We have taken a number of actions described below to increase our liquidity and strengthen our financial position as we navigate these uncertain times.
Our primary cash requirements are for the ongoing operations of our existing early education and child care centers, back-up care, and educational advisory and other services, 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 $418.6 million in cash ($429.1 million including restricted cash) at June 30, 2021, of which $54.3 million was held in foreign jurisdictions, compared to $384.3 million in cash ($388.5 million including restricted cash) at December 31, 2020, of which $43.6 million was held in foreign jurisdictions. Operations outside of North America accounted for 27% and 21% of our consolidated revenue in the six months ended June 30, 2021 and 2020, respectively. The net impact on our liquidity from changes in foreign currency exchange rates was not material for the six months ended June 30, 2021 and 2020, and 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 2021.
On April 21, 2020, we completed the issuance and sale of 2,138,580 shares of common stock to Durable Capital Master Fund LP at a price of $116.90 per share. We raised net proceeds from the offering of $249.8 million, which further strengthened our liquidity and financial position and increased our cash and cash equivalents.
Our revolving credit facility is part of our senior secured credit facilities, which consist of a secured term loan facility and a $400 million revolving credit facility. There were no borrowings outstanding on our revolving credit facility at June 30, 20202021 and December 31, 2019. In April and May 2020, we amended our existing senior credit facilities to, among other changes, increase the borrowing capacity of our revolving credit facility by $175 million, to a total of $400 million, modify the interest rates applicable to borrowings outstanding on the revolving credit facility, and modify the terms of the applicable covenants. Refer to Note 6, Credit Arrangements and Debt Obligations, in our condensed consolidated financial statements for additional information on the amendments to our credit agreement.
We had $270.4 million in cash ($274.7 million including restricted cash) at June 30, 2020, of which $28.4 million was held in foreign jurisdictions, compared to $27.9 million in cash ($31.2 million including restricted cash) at December 31, 2019, of which $14.2 million was held in foreign jurisdictions. Operations outside of North America accounted for 21% and 24% of our consolidated revenue in the six months ended June 30, 2020 and 2019, respectively. The net impact on our liquidity from changes in foreign currency exchange rates was not material for the six months ended June 30, 2020 and 2019, and 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 2020.
On April 21, 2020, we completed the issuance and sale of 2,138,580 shares of unregistered common stock to Durable Capital Master Fund LP at a price of $116.90 per share. We raised net proceeds from the offering of $249.8 million, which further strengthened our liquidity and financial position and increased cash and cash equivalents at June 30, 2020.
We had working capital of $85.4$89.9 million and a working capital deficit of $254.4$93.4 million at June 30, 20202021 and December 31, 2019,2020, respectively. Our working capital improvement is related to the capital raised from the issuance and sale of stock in April 2020. We typically have a working capital deficit that has primarily arisen from using cash generated from operations to make long-term investments in fixed assets and acquisitions, and from share repurchases. We anticipate that our cash flows from operating activities will continue to be adversely impacted at least during the temporary closure of our centers and while our re-opened centers ramp enrollment;enrollment and while certain centers remain temporarily closed. During this re-enrollment and re-opening phase, cash flows from operating activities will be supplemented with our existing cash, as well as borrowings available under our revolving credit facility, to fund operations.as needed. As we continue to re-openfocus on the re-enrollment and ramping of re-opened centers, as well as re-opening our remaining temporarily closed centers, in the coming months, we will continue to manage our discretionary operating and capital spending and prioritize investments that support current operations and strategic opportunities, as well as the principal and interest payments on our debt.
We have participated in certain government assistancesupport programs, including certain tax deferrals and tax credits allowed pursuant to the CARES Act and the CAA in the United States, andas well as certain tax deferrals, tax credits, and employee wage support in the United Kingdom, and may continue to do so in the future. During the six months ended June 30, 2021 and 2020, $17.0 million and $39.6 million, respectively, was recorded as a reduction to incurred labor costs primarily in cost of services which consists of $10.3 million of payroll tax credits in the United States and $29.3 million of employee wage support in the United Kingdom.relation to these benefits. As of June 30, 2021 and December 31, 2020, $19.2$10.9 million and $8.4 million, respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts duereceivable from government assistance programs in relation to these benefits.support programs. Additionally, approximately $6.6the Company had payroll tax deferrals totaling $20.4 million as of June 30, 2021 and $6.7December 31, 2020, of which $10.2 million was recordedincluded in accounts payable and accrued expenses and $10.2 million was included in other long-term liabilities, respectively, related to payroll tax deferrals.liabilities. There is no assurance that these government support programs will continue in the future at current levels, or at all.
In response to the broad effects of COVID-19, we have re-negotiated certain payment terms with lessors to mitigate the impact on our financial position and operations. As of June 30, 2021 and December 31, 2020, the Companywe had $11.7$2.0 million and $7.7 million, respectively, in lease payment deferrals thatof which the majority are payable over the next 1.5 years. Additionally, accounts receivable, net of allowance for credit losses, increased from $148.9 million at December 31, 2019 to $221.5 million at June 30, 2020 attributable to the significant increase in the demand for back-up care services, in particular for self-sourced reimbursed care.year.
The board of directors authorized a share repurchase program of up to $300 million of our outstanding common stock, effective June 12, 2018. During the six months ended June 30, 2020 and prior to the impact of the pandemic on our operations,2021, we repurchased 231,3130.5 million shares for $32.2$70.3 million, and at June 30, 2020, $194.9$124.5 million remained available under the repurchase program. During the six months ended June 30, 2020, we repurchased 0.2 million shares for $32.2 million. All repurchased shares have been retired. At this time, we have temporarily suspended share repurchases as we prioritize investments to the most critical operating areas.
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 twelve months. However, prolonged disruptions to our operations, including as a result of continuedperiodically reinstated lockdowns, required school, child care and business closures and shelter-in-placerestrictions, and government mandates in response to the COVID-19 pandemic, may require financing beyond our existing cash and borrowing capacity, and 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.terms, if at all.
| | | | | | | | | | | |
Cash Flows | Six Months Ended June 30, | | |
| 2020 | | 2019 |
| (In thousands) | | |
Net cash provided by operating activities | $ | 51,260 | | | $ | 190,611 | |
Net cash used in investing activities | $ | (28,275) | | | $ | (90,899) | |
Net cash provided by (used in) financing activities | $ | 221,470 | | | $ | (112,378) | |
Cash, cash equivalents and restricted cash — beginning of period | $ | 31,192 | | | $ | 38,478 | |
Cash, cash equivalents and restricted cash — end of period | $ | 274,739 | | | $ | 26,226 | |
| | | | | | | | | | | |
Cash Flows | Six Months Ended June 30, |
| 2021 | | 2020 |
| | | |
| (In thousands) |
Net cash provided by operating activities | $ | 135,725 | | | $ | 51,260 | |
Net cash used in investing activities | $ | (37,656) | | | $ | (28,275) | |
Net cash provided by (used in) financing activities | $ | (56,740) | | | $ | 221,470 | |
Cash, cash equivalents and restricted cash — beginning of period | $ | 388,465 | | | $ | 31,192 | |
Cash, cash equivalents and restricted cash — end of period | $ | 429,119 | | | $ | 274,739 | |
Cash Provided by Operating Activities
Cash provided by operating activities was $51.3$135.7 million for the six months ended June 30, 2020,2021, compared to $190.6$51.3 million for the same period in 2019.2020. The decreaseincrease in cash provided by operating activities primarily resulted from the $60.3 million decrease in net income from the prior year, and from changes in working capital arising from the timing of billings and payments when compared to the prior year, including significantimproved timing of collections, and increases in accounts receivable associated with the increased volumegrowth in the back-upfull service center-based child care segment inand the second quarter of 2020, and anrelated increase in other current assets for amounts due from government support programs which were not presenttuition fees collected in the prior year.advance as children re-enroll at our centers. The decreaseincrease in cash provided by operating activities was partially offset by client deposits, the effects of rent payment deferrals,$5.1 million and tenant improvement allowances during$11.1 million decrease in net income and non-cash items, respectively, from the period.prior year.
Cash Used in Investing Activities
Cash used in investing activities was $28.3$37.7 million for the six months ended June 30, 2020,2021, compared to $90.9$28.3 million for the same period in 20192020, and was related to fixed asset additions, acquisitions, and other investments. The decreaseincrease in cash used in investing activities was primarily related to acquisitions, as we used $9.1 million for the acquisition of two centers as well as a lower volumecamp and back-up care provider, and to a lesser extent, settlements of fixed asset additions andprior year acquisitions in 2020 as we prioritized investmentsthe six months ended June 30, 2021, compared to $4.4 million used for acquisitions in the most critical operating areas in response to the COVID-19 pandemic, and an investment of $19.8 million in debt securities in 2019, which were purchased by our wholly-owned captive insurance company using restricted cash.prior year. During the six months ended June 30, 2020,2021, we invested $25.0$34.0 million net of proceeds from the sale of fixed assets, in fixed asset purchases for new child care centers, and maintenance and refurbishments in our existing centers, compared to a netwhich was broadly consistent with the $32.4 million investment of $45.0 million during the same period in the prior year. We used $4.3Proceeds from the sale of fixed assets were $5.5 million to acquire two centers in the six months ended June 30, 2020,2021 compared to $25.9$7.4 million used to acquire a provider of back-up care and four centers in the six months ended June 30, 2019. These uses of cash during the six months ended June 30, 2020 were partially offset by $1.1 million in net restricted cash proceeds generated from the maturity of debt securities held by our wholly-owned captive insurance company.prior year.
Cash Provided by (Used in) Financing Activities
Cash provided byused in financing activities was $221.5$56.7 million for the six months ended June 30, 20202021 compared to cash usedprovided by financing activities of $112.4$221.5 million for the same period in 2019. Cash provided by2020. The change in financing activities forwas primarily related to capital raised in the six months ended June 30, 2020 was primarily related to proceeds raisedof $249.9 million from the issuance and sale of common stock in a private transaction of $249.9 million and proceeds from the exercise of stock options and the issuance and sale of restricted stock of $21.2 million, partially offset by cash used foran increase in share repurchases, of $32.7which were $70.3 million taxes paid related to the net share settlement of stock awards totaling $7.7 million and payments of debt principal of $5.4 million. Cash used in financing activities for the six months ended June 30, 2019 consisted primarily of repayments of $117.92021 compared to $32.7 million net of borrowings, onin the revolving credit facility, taxes paid related to the net share settlement of stock awards totaling $5.5 million, and payments of debt principal of $5.4 million. These uses of cash were partially offset by proceeds from the exercise of stock options and the issuance and sale of restricted stock of $17.1 million.prior year.
Debt
Our senior secured credit facilities consist of a secured term loan facility and a $400 million multi-currency revolving credit facility. The term loans matureloan matures on November 7, 2023 and requirerequires quarterly principal payments of $2.7 million, with the remaining principal balance due on November 7, 2023.
Outstanding term loan borrowings were as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| | | |
| (In thousands) |
Term loan | $ | 1,029,313 | | | $ | 1,034,688 | |
Deferred financing costs and original issue discount | (3,130) | | | (3,801) | |
Total debt | 1,026,183 | | | 1,030,887 | |
Less current maturities | (10,750) | | | (10,750) | |
Long-term debt | $ | 1,015,433 | | | $ | 1,020,137 | |
On May 26, 2021, the Company amended its existing senior credit facilities to, among other changes, extend the revolving credit facility maturity date from July 31, 2022 to May 26, 2026 (subject to a springing maturity to August 8, 2023 if more than $25 million of the term loans have not been repaid, refinanced or extended), and reduce the interest rates applicable to borrowings outstanding on the revolving credit facility. There were no borrowings outstanding on the revolving credit facility at June 30, 2021 and December 31, 2020, with $400 million available for borrowing.
Outstanding term loan borrowings were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Term loans | $ | 1,040,063 | | | $ | 1,045,438 | |
Deferred financing costs and original issue discount | (4,512) | | | (6,639) | |
Total debt | 1,035,551 | | | 1,038,799 | |
Less current maturities | 10,750 | | | 10,750 | |
Long-term debt | $ | 1,024,801 | | | $ | 1,028,049 | |
In April and May 2020, we amended our existing senior credit facilities to, among other things, increase the borrowing capacity of our revolving credit facility from $225 million to $400 million, modify the interest rates applicable to borrowings outstanding on the revolving credit facility, and modify the terms of the applicable covenants. The revolving credit facility matures on July 31, 2022. There were no borrowings outstanding on the revolving credit facility at June 30, 2020 and December 31, 2019, with the full line available for borrowings.
Borrowings under the credit agreement are subject to variable interest. We mitigate our interest rate exposure with variable-to-fixed interest rate swap agreements with an underlying fixed notional value of $500 million. These swap agreements,million, designated and accounted for as cash flow hedges from inception, that are scheduled to mature on October 31, 2021. The weighted average interest rate for the term loansloan was 3.31%3.06% and 3.96%3.31% for the six months ended June 30, 20202021 and 2019,2020, respectively, including the impact of the interest rate swap agreements.
In June 2020, we entered into We have interest rate cap agreements with a total notional value of $800 million. These interest rate cap agreements,million, designated and accounted for as cash flow hedges from inception, that provide us with interest rate protection in the event the one-month LIBOR rate increases above 1%. 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 a forward starting effective date of October 29, 2021, which coincides with the maturity of our existing interest rate swap agreements, and expire on October 31, 2023. As of June 30, 2020, the fair value of the interest rate cap agreements was $1.2 million, which reflected the initial premium paid to purchase these caps.
All obligations under the senior secured credit facilities are secured by substantially all the assets of our U.S. subsidiaries. The senior secured credit facilities contain 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., the Company’s direct subsidiary, to be a passive holding company, subject to certain exceptions. Effective as of April 24, 2020, the revolving credit facility requires Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum first lien gross leverage ratio for four fiscal quarters, followed by a maximum first lien net leverage ratio in the quarters thereafter.quarterly maintenance based financial covenant. A breach of this covenant is subject to certain equity cure rights. Prior to the April 2020 credit amendment, the Company was required to comply with a maximum first lien net leverage ratio.
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 June 30, 2020.2021. Refer to Note 6, Credit Arrangements and Debt Obligations, in our condensed consolidated financial statements for additional information on our debt and credit arrangements.arrangements, and covenant requirements.
Off-Balance Sheet Arrangements
As of June 30, 2020,2021, we had no off-balance sheet arrangements.
Critical Accounting Policies
For a discussion of our “Critical Accounting Policies,” refer to Part II, Item 7, “Management’s“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, 2019.2020. There have been no material changes to our critical accounting policies since December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates and fluctuations in foreign currency exchange rates. Other than the broad effects of the COVID-19 pandemic and its negative impact on the global economy and major financial markets, there have been no material changes in our exposure to interest rate or foreign currency exchange rate fluctuations since December 31, 2019.2020. See Part II, Item 7A, “Quantitative“Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 20192020 for further information regarding market risk.
In addition, in June 2020, the Company entered into interest rate cap agreements with a total notional value of $800 million. These interest rate cap agreements provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 1%. 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 a forward starting effective date of October 29, 2021, which coincides with the maturity of the interest rate swap agreements, and expire on October 31, 2023. The Company may enter into additional derivatives or other market risk sensitive instruments in the future for the purpose of hedging or for trading purposes. Refer to Note 6, Credit Arrangements and Debt Obligations, in our condensed consolidated financial statements for additional information on interest rate cap agreements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2020,2021, 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 areis 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 areis 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 June 30, 2020.2021.
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 June 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal control over financial reporting due to the COVID-19 pandemic. We are continually monitoring and assessing its impact on the design, implementation and operating effectiveness of our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, subject to claims, suits, and matters arising in the ordinary course of business, some of which have not been fully adjudicated.business. Such claims have in the past generally been covered by insurance. We believe the resolution of such legal matters will not have a material adverse effect on our financial condition, results of operations or cash flows, although we cannot predict the ultimate outcome of any such actions. Furthermore,insurance, but there can be no assurance that our insurance will be adequate to cover all liabilities that may arise out of claims or matters brought against us. We believe the resolution of such legal matters will not have a material adverse effect on our financial position, results of operations, or cash flows, although we cannot predict the ultimate outcome of any such actions. Refer to Note 12, Contingencies, to the consolidated financial statements in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional information.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, includingwhich 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“Risk Factors,” inof our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could adversely affect our business, financial condition and operating results.2020, including with respect to the impacts from the ongoing COVID-19 pandemic. 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, may also materially impair our business, financial condition or results of operations. There have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the addition of the following risk factor:
The global COVID-19 pandemic has significantly disrupted our business and our financial condition and operating results and will continue to adversely impact our business.
The COVID-19 pandemic has disrupted our global operations as a result of required school and business closures and shelter-in-place mandates in response to the COVID-19 pandemic. We expect to continue to be impacted as the situation remains dynamic and subject to rapid and potentially material changes. As of June 30, 2020, we managed the operations for 1,076 child care and early education centers with the capacity to serve approximately 120,000 children and their families, of which 409 child care centers with the capacity to serve approximately 50,000 children were open after the temporary center closures in response to the COVID-19 pandemic. The continued or additional disruptions to our business and potential adverse impacts to our financial condition and results of operations resulting from the COVID-19 pandemic include, but are not limited to:
•significant changes in the conditions of the markets we operate in, including required school and business closures and shelter-in-place mandates, limiting our ability to provide our services, especially center-based child care and center-based back-up child care, and potentially resulting in continued center closures or permanent center closures;2020.
•reduced enrollment upon the re-opening of centers as families may limit their participation in various public activities and gatherings, including group child care, or as social distancing protocols and other licensing regulations may reduce group sizes or otherwise affect the overall capacity of children we can serve;
•inability to hire and maintain an adequate level of center staff requiring us to reduce enrollment in order to comply with mandated ratios, inability to retain teachers after long periods of furlough, and the impact to our operations if a significant percentage of our workforce is unable to return to work because of illness, quarantine, worker absenteeism, limitations on travel, government or social distancing restrictions, which may have a disproportionate impact on our business compared to other companies that depend less on the in-person provision of services;
•reduced or shifting demand for our services due to adverse and uncertain economic conditions, including as a result of clients that have been adversely impacted, and/or increased unemployment, continued school and business closures, long-term shift to an at-home workforce, and general effects of a broad-based economic recession;
•incremental costs associated with mitigating the effects of the pandemic and/or additional procedures and protocols required to maintain health and safety at our centers;
•a decrease in revenues due to clients requesting refunds or renegotiating contracts for reduced or changing services, including in our cost-plus and employer sponsor model centers;
•the potential deterioration in the collectability of our existing accounts receivable and a decrease in the generation of new revenue due to the potential diminished financial health of our clients;
•inability to implement our growth strategies due to prolonged business contraction and reduced capital expenditures and cost-saving initiatives;
•delayed re-opening of centers outside of our control due in large part to the interdependence of our operations with our client partners’ operating decisions and requirements as well as decisions by governmental authorities regarding school and business closures and requirements for re-opening;
•legal actions or proceedings related to COVID-19;
•reduction in our liquidity position limiting our ability to service our indebtedness and our future ability to incur additional indebtedness or financing; and
•further downgrades to our credit rating by ratings agencies which could reduce our ability to access capital markets.
These factors could place limitations on our ability to operate effectively and could have a material adverse effect on our operations, financial condition and operating results. As the situation continues to evolve and more information and guidance becomes available, we may adjust our current plans, policies and procedures to address the rapidly changing variables related to the pandemic. Additional impacts may arise of which we are currently not aware, the nature and extent of which will depend on future developments which are highly uncertain and cannot be predicted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the three months ended June 30, 2020, other than as reported in our Current Report on Form 8-K filed with the SEC on April 20, 2020 in connection with our offering of shares of the Company’s common stock pursuant to the stock purchase agreement dated as of April 19, 2020 with Durable Capital Master Fund LP. These securities were issued in a private placement, completed on April 21, 2020, in reliance on Section 4(a)(2) of the Securities Act. Refer to Note 1, Organization and Basis of Presentation, of the Notes to the Condensed Financial Statements and the discussion under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” in this Quarterly Report on Form 10-Q for additional details.
Issuer Repurchases
Issuer Purchases of Equity Securities
The table below sets forth information regarding purchases of our common stock during the quarterthree months ended June 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (a) | | Average Price Paid per Share (b) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) (c) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (In thousands) (1) (d) |
April 1, 2020 to April 30, 2020 (2) | | 467 | | | $ | 107.65 | | | — | | | $ | 194,850 | |
May 1, 2020 to May 31, 2020 | | — | | | $ | — | | | — | | | $ | 194,850 | |
June 1, 2020 to June 30, 2020 | | — | | | $ | — | | | — | | | $ | 194,850 | |
| | 467 | | | | | — | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (a) | | Average Price Paid per Share (b) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) (c) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (In thousands) (1) (d) |
| | | | | | | | |
April 1, 2021 to April 30, 2021 | | — | | | $ | — | | | — | | | $ | 194,850 | |
May 1, 2021 to May 31, 2021 | | 395,000 | | | $ | 135.62 | | | 395,000 | | | $ | 141,280 | |
June 1, 2021 to June 30, 2021 | | 120,000 | | | $ | 139.71 | | | 120,000 | | | $ | 124,515 | |
| | 515,000 | | | | | 515,000 | | | |
(1) The board of directors authorized a share repurchase program of up to $300 million of our outstanding common stock effective June 12, 2018. The share repurchase program has no expiration date. All repurchased shares have been retired.
(2) During the month of April 2020, we retired a total of 467 shares that had been issued pursuant to restricted stock award agreements in connection with the payment of tax withholding obligations arising as a result of the vesting of such restricted stock awards. The shares were valued using the transaction date and closing stock price for purposes of such tax withholdings. Shares retired in connection with the payment of tax withholding obligations are not included in, and are not counted against, our $300 million share repurchase authorization.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) Exhibits:
| | | | | | | | |
Exhibit Number | | Exhibit Title |
10.1 | | |
10.2 | | Fourth Amendment to Credit Agreement, dated as of April 24, 2020, by and among Bright Horizons Family Solutions LLC, Bright Horizons Capital Corp., the Loan parties, the Lenders party thereto, the Fourth Amendment Incremental Revolving Credit Lenders thereto, and JPMorgan Chase Bank N.A., as administrative agent and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed April 27, 2020). |
10.3 | | FifthSixth Amendment to Credit Agreement, dated as of May 7, 2020,26, 2021, by and among Bright Horizons Family Solutions LLC, Bright Horizons Capital Corp., the Loan Parties the Fifth Amendment Incremental Revolving Credit Lender partyas parties thereto, and JPMorgan Chase Bank, N.A., as Administrative Agentadministrative agent and L/C Issuer issuer, and each Refinancing Revolver Lender as parties thereto(incorporated by reference to Exhibit 10.599.1 to the Company’s QuarterlyCurrent Report on Form 10-Q,8-K, filed May 11, 2020)26, 2021). |
31.1* | | |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS* | | Inline XBRL Instance Document - the instance document does not appear in Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
| | | | | |
* | Exhibits filed herewith. |
** | Exhibits furnished herewith. |
| |
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: | August 10, 20206, 2021 | By: | /s/ Elizabeth Boland |
| | | Elizabeth Boland |
| | | Chief Financial Officer |
| | | (Duly Authorized Officer) |