Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.67M
2: EX-10.1 Material Contract HTML 851K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
12: R1 Cover HTML 73K
13: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 124K
14: R3 Condensed Consolidated Balance Sheets (Unaudited) HTML 41K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Income HTML 98K
(Unaudited)
16: R5 Condensed Consolidated Statements of Comprehensive HTML 46K
Income (Loss) (Unaudited)
17: R6 Condensed Consolidated Statements Of Changes In HTML 89K
Stockholders' Equity (Unaudited)
18: R7 Condensed Consolidated Statements of Cash Flows HTML 150K
(Unaudited)
19: R8 Organization and Basis of Presentation HTML 29K
20: R9 Revenue Recognition HTML 63K
21: R10 Leases HTML 46K
22: R11 Acquisitions HTML 28K
23: R12 Goodwill and Intangible Assets HTML 68K
24: R13 Credit Arrangements and Debt Obligations HTML 92K
25: R14 Earnings Per Share HTML 67K
26: R15 Income Taxes HTML 28K
27: R16 Fair Value Measurements HTML 38K
28: R17 Accumulated Other Comprehensive Income (Loss) HTML 52K
29: R18 Segment Information HTML 54K
30: R19 Subsequent Events HTML 23K
31: R20 Organization and Basis of Presentation (Policies) HTML 28K
32: R21 Revenue Recognition (Tables) HTML 58K
33: R22 Leases (Tables) HTML 48K
34: R23 Goodwill and Intangible Assets (Tables) HTML 76K
35: R24 Credit Arrangements and Debt Obligations (Tables) HTML 88K
36: R25 Earnings Per Share (Tables) HTML 69K
37: R26 Fair Value Measurements (Tables) HTML 28K
38: R27 Accumulated Other Comprehensive Income (Loss) HTML 52K
(Tables)
39: R28 Segment Information (Tables) HTML 50K
40: R29 Organization and Basis of Presentation (Details) HTML 49K
41: R30 Revenue Recognition - Disaggregation of Revenue HTML 45K
(Details)
42: R31 Revenue Recognition - Additional Information HTML 22K
(Details)
43: R32 Leases - Additional Information (Details) HTML 30K
44: R33 Leases - Lease Expense (Details) HTML 27K
45: R34 Leases - Weighted Average Remaining Lease Term and HTML 25K
Discount Rate (Details)
46: R35 Leases - Maturities of Lease Liabilities (Details) HTML 43K
47: R36 Acquisitions (Details) HTML 95K
48: R37 Goodwill and Intangible Assets - Changes in HTML 37K
Carrying Amount of Goodwill (Details)
49: R38 Goodwill and Intangible Assets - Intangible Assets HTML 49K
(Details)
50: R39 Goodwill and Intangible Assets - Estimated HTML 31K
Amortization Expense Related to Intangible Assets
(Details)
51: R40 Credit Arrangements and Debt Obligations - Senior HTML 72K
Secured Credit Facilities (Details)
52: R41 Credit Arrangements and Debt Obligations - HTML 40K
Outstanding Borrowing (Details)
53: R42 Credit Arrangements and Debt Obligations - Future HTML 40K
Principal Payments Under New Term Loan (Details)
54: R43 Credit Arrangements and Debt Obligations - HTML 48K
Derivative Financial Instruments (Details)
55: R44 Credit Arrangements and Debt Obligations - HTML 33K
Schedule of Derivatives by Balance Sheet Location
(Details)
56: R45 Credit Arrangements and Debt Obligations - Effect HTML 58K
of Derivatives on Other Comprehensive Income
(Loss) (Details)
57: R46 Earnings Per Share - Computation of Basic Earnings HTML 60K
Per Common Share (Details)
58: R47 Earnings Per Share - Computation of Diluted HTML 51K
Earnings per Common Share (Details)
59: R48 Earnings Per Share - Additional Information HTML 26K
(Details)
60: R49 Income Taxes (Details) HTML 40K
61: R50 Fair Value Measurements - Additional Information HTML 60K
(Details)
62: R51 Fair Value Measurements - Roll Forward of HTML 32K
Recurring Level 3 Fair Value Measurements
(Details)
63: R52 Accumulated Other Comprehensive Income (Loss) HTML 49K
(Details)
64: R53 Segment Information - Income from Operations by HTML 45K
Segment (Details)
65: R54 Subsequent Event (Details) HTML 36K
68: XML IDEA XML File -- Filing Summary XML 122K
66: XML XBRL Instance -- bfam-20220630_htm XML 1.85M
67: EXCEL IDEA Workbook of Financial Reports XLSX 116K
8: EX-101.CAL XBRL Calculations -- bfam-20220630_cal XML 182K
9: EX-101.DEF XBRL Definitions -- bfam-20220630_def XML 498K
10: EX-101.LAB XBRL Labels -- bfam-20220630_lab XML 1.39M
11: EX-101.PRE XBRL Presentations -- bfam-20220630_pre XML 815K
7: EX-101.SCH XBRL Schema -- bfam-20220630 XSD 137K
69: JSON XBRL Instance as JSON Data -- MetaLinks 357± 541K
70: ZIP XBRL Zipped Folder -- 0001437578-22-000020-xbrl Zip 463K
Registrant’s telephone number, including area code: i(617)i673-8000
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
iCommon
Stock, $0.001 par value per share
iBFAM
iNew York Stock Exchange
Indicate by check mark whether the
registrant (1) has 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. iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☒
As of July 26, 2022, there were i57,810,875
shares of common stock outstanding.
Accounts
receivable — net of allowance for credit losses of $i2,790 and $i3,006 at June 30,
2022 and December 31, 2021, respectively
i171,114
i210,971
Prepaid
expenses and other current assets
i75,370
i68,320
Total
current assets
i516,909
i540,271
Fixed
assets — net
i558,143
i598,134
Goodwill
i1,441,185
i1,481,725
Other
intangible assets — net
i235,769
i251,032
Operating
lease right-of-use assets
i678,809
i696,425
Other
assets
i94,578
i72,460
Total
assets
$
i3,525,393
$
i3,640,047
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
i16,000
$
i16,000
Accounts
payable and accrued expenses
i208,458
i197,366
Current
portion of operating lease liabilities
i87,130
i87,341
Deferred
revenue
i212,955
i258,438
Other
current liabilities
i74,815
i63,030
Total
current liabilities
i599,358
i622,175
Long-term
debt — net
i968,989
i976,396
Operating
lease liabilities
i686,971
i703,911
Other
long-term liabilities
i89,952
i100,091
Deferred
revenue
i9,320
i9,689
Deferred
income taxes
i51,817
i48,509
Total
liabilities
i2,406,407
i2,460,771
Stockholders’
equity:
Preferred stock, $ii0.001/
par value; ii25,000,000/ shares
authorized; iiiino///
shares issued or outstanding at June 30, 2022 and December 31, 2021
i—
i—
Common
stock, $ii0.001/ par value; ii475,000,000/
shares authorized; ii58,622,868/ and ii59,305,160/
shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
i59
i59
Additional
paid-in capital
i680,618
i745,615
Accumulated
other comprehensive loss
(i77,003)
(i37,359)
Retained
earnings
i515,312
i470,961
Total
stockholders’ equity
i1,118,986
i1,179,276
Total
liabilities and stockholders’ equity
$
i3,525,393
$
i3,640,047
See
accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iORGANIZATION
AND BASIS OF PRESENTATION
Organization — Bright Horizons Family Solutions Inc. (“Bright Horizons” or the “Company”) provides center-based early education and child care, 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 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 child care, dependent care, 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. On July 1, 2022, the Company, through wholly-owned subsidiaries, completed the acquisition of the outstanding shares of Only About Children, a child care operator in Australia. See Note 12, Subsequent Event, for additional information.
i
Basis
of Presentation — The accompanying unaudited condensed consolidated balance sheet as of June 30, 2022 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended June 30, 2022 and 2021 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, 2021. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
In the opinion of the Company’s management, the Company’s unaudited condensed consolidated balance sheet as of June 30, 2022 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’
equity, and cash flows for the interim periods ended June 30, 2022 and 2021, 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 $i400
million of the Company’s outstanding common stock effective December 16, 2021. The share repurchase program has no expiration date and replaced the prior June 2018 authorization. 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. During the six months ended June 30, 2022, the Company repurchased i0.9
million shares for $i84.2 million. At June 30, 2022, $i296.4
million remained available under the repurchase program. During the six months ended June 30, 2021, i0.5 million shares were repurchased for $i70.3 million. All
repurchased shares have been retired.
Government Support — During the six months ended June 30, 2022 and 2021, the Company participated in government support programs that were enacted in response to the economic impact of the COVID-19 pandemic, including availing itself of certain tax deferrals, tax credits and federal block grant funding in the United States, as well as employee wage support in the United Kingdom.
During the six months ended June 30, 2022 and 2021, $i46.7
million and $i17.0 million, respectively, was recorded as a reduction to cost of services in relation to these benefits, of which $i16.0 million
and $i5.7 million, respectively, reduced the operating subsidy revenue due from employers for the related child care centers. Additionally during the six months ended June 30, 2022, amounts received for tuition support of $i3.4 million
were recorded to revenue. As of June 30, 2022 and December 31, 2021, $i1.6 million and $i3.3 million,
respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government support programs. As of June 30, 2022 and December 31, 2021, $i7.0 million and $i3.9 million
was recorded to other current liabilities related to government support received related to future periods, and as of June 30, 2022 and December 31, 2021, payroll tax deferrals of $ii7.0/ million
were recorded in accounts payable and accrued expenses on the consolidated balance sheet.
The Company disaggregates revenue from contracts with customers into segments and geographical regions. iRevenue disaggregated by segment and geographical region was as follows:
The
classification “North America” is comprised of the Company’s United States and Puerto Rico operations and the classification “Europe” includes the Company’s United Kingdom, Netherlands, and India operations.
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, 2022 and 2021, $i181.0 million and $i146.7
million was recognized as revenue related to the deferred revenue balance recorded at December 31, 2021 and December 31, 2020, respectively.
Remaining Performance Obligations
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. iLEASES
The Company has operating leases for certain of
its full service and back-up early education and child care centers, corporate offices, call centers, and to a lesser extent, various office equipment, in the United States, the United Kingdom, and the Netherlands. Most of the leases expire within i10 to i15 years and many contain renewal
options and/or termination provisions. As of June 30, 2022 and December 31, 2021, there were no material finance leases.
The following table summarizes the maturity of lease liabilities as of June 30, 2022:
Operating Leases
(In
thousands)
Remainder of 2022
$
i53,830
2023
i129,356
2024
i120,547
2025
i109,078
2026
i100,861
Thereafter
i508,251
Total
lease payments
i1,021,923
Less imputed interest
(i247,822)
Present
value of lease liabilities
i774,101
Less current portion of operating lease liabilities
(i87,130)
Long-term
operating lease liabilities
$
i686,971
/
As of June 30, 2022, the Company had entered into additional operating
leases that have not yet commenced with total fixed payment obligations of $i27.5 million. The leases are expected to commence between the third quarter of 2022 and the first quarter of 2023 and have initial lease terms of approximately i10
to i15 years.
4. iACQUISITIONS
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 the Company’s existing operations, including cost efficiencies and leveraging existing client relationships, as well as from benefits derived from gaining the related assembled workforce.
2022 Acquisitions
During the six months ended June 30, 2022, the Company acquired ione
center in the Netherlands, which was accounted for as a business combination. This business was acquired for aggregate cash consideration of $i3.3 million and consideration payable of $i0.2
million. The Company recorded goodwill of $i3.1 million related to the full service center-based child care segment in relation to this acquisition, which will not be deductible for tax purposes. In addition, the Company recorded intangible assets of $i0.5
million that will be amortized over ifour years.
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, 2022, the purchase price allocation for this acquisition remains open as the Company gathers additional information regarding the assets acquired and the liabilities assumed. The operating results for the acquired 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, 2022, the Company paid contingent consideration of $i19.1 million
related to an acquisition completed in 2019 and contingent consideration of $i0.2 million related to an acquisition completed in 2021. Of the total amounts paid of $i19.3
million, $i13.9 million had been recorded as a liability at the date of acquisition and presented as cash used in financing activities in the consolidated statement of cash flows with remaining amounts reflected as cash used in operating activities.
On July 1, 2022, the Company, through wholly-owned subsidiaries,
completed the acquisition of the outstanding shares of Only About Children, a child care operator in Australia, for aggregate consideration of AUD$i450 million. See Note 12, Subsequent Event, for additional information.
2021 Acquisitions
During the year ended December 31, 2021, the
Company acquired itwo centers as well as a school-age camp provider in the United States, i13 centers in the United Kingdom, and ithree
centers in the Netherlands, in ifive separate business acquisitions, which were each accounted for as a business combination. These businesses were acquired for aggregate cash consideration of $i53.2 million,
net of cash acquired of $i2.2 million, and consideration payable of $i0.6 million. Additionally,
the Company is subject to contingent consideration payments for itwo of these acquisitions, and recorded a fair value estimate of $i7.3 million
in relation to these contingent consideration arrangements at acquisition. Contingent consideration of up to $i1.2 million was payable within ione
year from the date of acquisition if certain performance targets were met for ione of the acquisitions, of which $i0.8 million
was paid in 2021 based on the performance targets met. Contingent consideration is payable in 2026 based on certain financial metrics for the other acquisition. The Company recorded goodwill of $i39.5 million related to the full service center-based child care segment, of which $i3.4 million
will be deductible for tax purposes, and $i14.6 million related to the back-up care segment, all of which will be deductible for tax purposes. In addition, the Company recorded intangible assets of $i5.7 million
that will be amortized over ifive years, as well as fixed assets of $i10.1 million
in relation to these acquisitions.
The allocation of purchase price consideration is based on preliminary estimates of fair value; such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). As of June 30, 2022, the purchase price allocations for ithree of the acquisitions remain open as the Company gathers
additional information regarding the assets acquired and the liabilities assumed.
During the year ended December 31, 2021, the Company paid $i0.6 million for contingent consideration related to acquisitions completed in 2021, which had been recorded as a liability at the date of acquisition.
5. iGOODWILL
AND INTANGIBLE ASSETS
i
The changes in the carrying amount of goodwill were as follows:
iThe
Company estimates that it will record amortization expense related to intangible assets existing as of June 30, 2022 as follows over the next five years:
The Company's senior secured credit facilities consist of a term loan B facility of $i600
million (“term loan B”) and a term loan A facility of $i400 million (“term loan A”), collectively the “term loan facilities” or “term loans,” as well as a $i400
million multi-currency revolving credit facility (“revolving credit facility”). iLong-term debt obligations were as follows:
Deferred
financing costs and original issue discount
(i7,011)
(i7,604)
Total
debt
i984,989
i992,396
Less
current maturities
(i16,000)
(i16,000)
Long-term
debt
$
i968,989
$
i976,396
All
borrowings under the credit facilities are subject to variable interest. The effective interest rate for the term loans was i3.62% and i2.29% at June 30,
2022 and December 31, 2021, respectively, and the weighted average interest rate was i2.56% and i2.50% for the six months ended June 30,
2022 and 2021, respectively, prior to the effects of any interest rate hedge arrangements. The weighted average interest rate for the revolving credit facility was i5.25% and i4.00%
for the six months ended June 30, 2022 and 2021, respectively.
Term Loan B Facility
The iseven-year term loan B matures on November 23, 2028 and requires quarterly principal payments equal to i1%
per annum of the original aggregate principal amount of the term loan B, with the remaining principal balance due at maturity. Borrowings under the term loan B facility bear interest at a rate per annum of i1.25% over the base rate, or i2.25%
over the eurocurrency rate. The eurocurrency rate is the one, three or six month LIBOR rate or, with applicable lender approval, the nine or twelve month or less than one month LIBOR rate, subject to an interest rate floor of i0.50%. The base rate is subject to an interest rate floor of i1.50%.
Term
Loan A Facility
The ifive-year term loan A matures on November 23, 2026 and requires quarterly principal payments equal to i2.5% per annum of the original aggregate principal amount of the term loan A in
each of the first three years, i5.0% in the fourth year, and i7.5% in the fifth year. The remaining principal balance is due at maturity. Borrowings under the term loan A facility bear interest at a rate per annum ranging from i0.50%
to i0.75% over the base rate, subject to an interest rate floor of i1.00%, or i1.50%
to i1.75% over the eurocurrency rate. The eurocurrency rate is the one, three or six month LIBOR rate or, with applicable lender approval, the nine or twelve month or less than one month LIBOR rate.
Revolving Credit Facility
The $i400
million multi-currency revolving credit facility matures on May 26, 2026. There were iino/
borrowings outstanding on the revolving credit facility at both June 30, 2022 and December 31, 2021.
Borrowings under the revolving credit facility bear interest at a rate per annum ranging from i0.50% to i0.75%
over the base rate, subject to an interest rate floor of i1.00%, or i1.50% to i1.75%
over the eurocurrency rate.
Debt Covenants
All obligations under the senior secured credit facilities are secured by substantially all the assets of the Company’s material 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 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 the 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. The term loan A and the revolving credit facility require Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum first lien net leverage ratio not to exceed i4.25
to 1.00. A breach of the applicable covenant is subject to certain equity cure rights.
i
Future principal payments of long-term debt are as follows for the years ending December 31:
Long-term debt
(In
thousands)
Remainder of 2022
$
i8,000
2023
i16,000
2024
i18,500
2025
i28,500
2026
i351,000
Thereafter
i570,000
Total
future principal payments
$
i992,000
/
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. The Company’s risk management policy permits using derivative instruments to manage interest rate and other risks. The Company uses interest rate swaps and caps to manage a portion of the risk related to changes in cash flows from interest rate movements. In June 2020, the Company entered into interest rate cap agreements with a total notional value of $i800
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 i1%. Interest rate cap agreements for $i300
million notional value have an effective date of June 30, 2020 and expire on October 31, 2023, while interest rate cap agreements for another $i500 million notional amount have an effective date of October 29, 2021 and expire on October 31, 2023.
In December 2021, the
Company entered into additional interest rate cap agreements with a total notional value of $i900 million designated and accounted for as cash flow hedges from inception. Interest rate cap agreements for $i600
million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2025, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above i2.5%. Interest rate cap agreements for $i300
million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2026, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above i3.0%.
During the six months ended June 30, 2022, the
Company entered into foreign currency forward contracts in connection with an acquisition in Australia completed in July 2022. The Company entered into the foreign currency forwards to lock the purchase price in US dollars at closing and mitigate the impact of foreign currency fluctuations between signing of the definitive purchase agreement on May 3, 2022 and closing. The forward contracts have a total notional value of approximately AUD$i320 million,
which included the expected payments for the purchase price and for letters of credit used to guarantee certain lease arrangements. The cash flows associated with the business combination do not meet the criteria to be designated and accounted for as a cash flow hedge and, as such, foreign currency gains and losses on these forwards are recorded on the consolidated statement of income. During the six months ended June 30, 2022, the Company recognized realized losses of $i4.6
million and unrealized losses of $i1.3 million in relation to these forwards due to fluctuations in the Australian dollar.
i
The
fair value of the derivative financial instruments was as follows for the periods presented:
During
the next twelve months, the Company estimates that a net gain of $i16.2 million, pre-tax, will be reclassified from accumulated other comprehensive income (loss) and recorded as a reduction to interest expense related to these derivative financial instruments.
Plus:
earnings allocated to unvested participating shares
i105
i82
i187
i109
Less:
adjusted earnings allocated to unvested participating shares
(i104)
(i81)
(i186)
(i108)
Earnings
allocated to common stock
$
i24,841
$
i18,734
$
i44,165
$
i25,839
Weighted
average common shares outstanding:
Common stock
i59,113,044
i60,551,528
i59,103,884
i60,573,237
Effect
of dilutive securities
i139,825
i555,264
i230,223
i643,146
Weighted
average common shares outstanding — diluted
i59,252,869
i61,106,792
i59,334,107
i61,216,383
Earnings
per common share:
Common stock
$
i0.42
$
i0.31
$
i0.74
$
i0.42
/
Options
outstanding to purchase i2.0 million and i1.0
million shares of common stock were excluded from diluted earnings per share for the three months ended June 30, 2022 and 2021, respectively, and i1.6 million and i0.9
million shares of common stock were excluded for the six months ended June 30, 2022 and 2021, respectively, since their effect was anti-dilutive. These options may become dilutive in the future.
The Company’s effective income tax rates were i26.6% and i23.0%
for the three months ended June 30, 2022 and 2021, respectively and i23.6% and i10.9%
for the six months ended June 30, 2022 and 2021, 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, 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, 2022, the excess tax benefit from stock-based compensation expense decreased tax expense by $i0.7
million and $i2.7 million, respectively. During the three and six months ended June 30, 2021, the excess tax benefit from stock-based compensation expense decreased tax expense by $i1.2
million and $i5.1 million, respectively. For the three and six months ended June 30, 2022 and 2021, prior to the inclusion of the excess tax benefit and other discrete items, the effective income tax rate approximated ii28/%.
The
Company’s unrecognized tax benefits were $i4.2 million at June 30, 2022 and $i3.9
million at December 31, 2021, inclusive of interest. 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 izero
to $i0.5 million.
The Company and its domestic subsidiaries are subject to U.S. federal income tax as well as tax in 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 2018 through 2020 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. As of June 30, 2022, there was ione
income tax audit in process and the tax years from 2017 to 2020 are subject to audit.
The Company is also subject to corporate income tax for its subsidiaries located in the United Kingdom, the Netherlands, India, 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. iFAIR
VALUE MEASUREMENTS
i
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 consisted mainly of cash and accounts receivable. The Company mitigates its exposure by maintaining its cash 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. No significant credit concentration risk existed at June 30, 2022.
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 or prices for similar instruments from active markets. As such, the Company’s long-term
debt was classified as Level 2. As of June 30, 2022, the carrying value and estimated fair value of long-term debt was $i992.0 million and $i963.6 million, respectively. As
of December 31, 2021, the estimated fair value approximated the carrying value of long-term debt.
Derivative Financial Instruments —The Company’s interest rate cap agreements are recorded at fair value and 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 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 caps, it was not considered a significant input. The fair value of the interest rate caps are classified as Level 2. As of June 30, 2022 and December 31, 2021, the fair value of the interest rate cap agreements was $i40.5
million and $i8.8 million, respectively, which was recorded in other assets on the consolidated balance sheet.
The Company's foreign currency forward contracts are recorded at fair value based on the foreign currency exchange rates in effect at the end of the reporting period. During the six months ended June 30,
2022, the Company recognized realized losses of $i4.6 million and unrealized losses of $i1.3
million in relation to these forwards due to fluctuations in the Australian dollar.
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 certificates of 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 and are classified as Level 1. As of June 30,
2022, the fair value of the available-for-sale debt securities was $i26.6 million and was classified based on the instruments’ maturity dates, with $i22.9
million included in prepaid expenses and other current assets and $i3.7 million in other assets on the consolidated balance sheet. As of December 31, 2021, the fair value of the available-for-sale debt securities was $i29.9
million, with $i22.7 million included in prepaid expenses and other current assets and $i7.2 million in other assets
on the consolidated balance sheet. At June 30, 2022 and December 31, 2021, the amortized cost was $i26.9 million and $i30.0
million, respectively. The debt securities held at June 30, 2022 had remaining maturities ranging from less than ione year to approximately i1.5 years. Unrealized gains and losses, net of tax, on available-for-sale debt securities were
immaterial for the three and six months ended June 30, 2022 and 2021.
Liabilities for Contingent Consideration —The Company is subject to contingent consideration arrangements in connection with certain business 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 on the Company’s consolidated statement of income. The fair
value of contingent consideration was generally calculated using customary valuation models based on probability-weighted outcomes of meeting certain future performance targets and forecasted results. The key inputs to the valuations are the projections of future financial results in relation to the businesses and the company-specific discount rates. The Company classified the contingent consideration liabilities as a Level 3 fair value measurement due to the lack of observable inputs used in the model. During the six months ended June 30, 2022, contingent consideration liabilities of $i19.3
million were paid related to acquisitions completed in 2019 and 2021. The contingent consideration liabilities outstanding as of June 30, 2022 related to 2021 acquisitions. See Note 4, Acquisitions, for additional information.
i
The following table provides a roll forward of the recurring Level 3 fair value measurements:
10. iACCUMULATED
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.
(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. iSEGMENT
INFORMATION
The Company’s reportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory and other services. The full service center-based child care segment includes the traditional center-based early education and child care, preschool, and elementary education. The Company’s back-up care segment consists of center-based back-up child care, in-home care for children and adult/elder dependents, school-age camps, virtual tutoring, 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, related educational advising, college admissions advisory services, and an online marketplace for families and caregivers, which have been aggregated. The Company and its chief operating decision maker evaluate performance based on revenue and income 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.
(1) For
the three months ended June 30, 2022, income from operations included $i2.5 million of transaction costs related to acquisitions which was allocated to the full service center-based child care segment.
(1) For
the six months ended June 30, 2022, income from operations included $i2.5 million of transaction costs related to acquisitions which was allocated to the full service center-based child care segment.
/
12. iSUBSEQUENT
EVENT
On July 1, 2022, the Company, through wholly-owned subsidiaries, completed the acquisition of the outstanding shares of Only About Children, a child care operator in Australia, for aggregate consideration of AUD$i450 million. The
Company paid approximately AUD$i300 million (USD$i207 million), net of cash acquired,
and subject to customary purchase price adjustments, and will pay an additional USD$i106.5 million i18 months after closing. The initial purchase
price was financed with cash on hand. The Company is the process of completing its preliminary purchase accounting and the allocation of the consideration paid to the acquired assets and assumed liabilities and therefore no additional information is available. Only About Children operates approximately 75 centers in Australia.
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 the ongoing COVID-19 pandemic and government responses thereto on our operations; the continued operation of currently open centers, timing to re-enroll and re-ramp centers as well as certain back-up care services and use types; enrollment recovery and occupancy improvement; our cost management and capital spending; labor costs and investments in employees and wages; future labor rates and labor markets for teachers and staff; continued contributions from our back-up care segment; access to and
impact of government relief and support programs; pricing strategies; leases; ability to respond to changing market conditions; our growth; our strategies; ability to regain and sustain business and strategic growth priorities; demand for services; our value proposition, client relations and partnerships; macroeconomic trends; investments in user experience and service delivery; the impact of accounting principles, pronouncements and policies; impact of the Only About Children acquisition; 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; the impact of foreign currency exchange rates; our share repurchase program; the outcome of litigation, legal proceedings and our insurance
coverage; debt securities, our interest rate caps, interest rates and projections; interest expense, the use of derivatives or other market risk sensitive instruments, our indebtedness; borrowings under our senior secured credit facilities, the need for additional debt or equity financing, and our ability to obtain such financing; our sources and uses of cash flow; our ability to fund operations and make capital expenditures and payments with cash and cash equivalents and borrowings; and our ability to meet financial obligations and comply with covenants of our senior secured credit facilities.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those disclosed in our Annual Report on Form 10-K for the year ended December 31,
2021, including with respect to the ongoing impacts from the COVID-19 pandemic, as well as other factors disclosed from time to time in our other filings with the SEC.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent
periods.
Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments, except as required by law.
Overview
The following is a discussion of the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of Bright Horizons Family Solutions Inc. (“we” or the “Company”) for the three and six months ended June 30, 2022, as compared to the three and six months ended June
30, 2021. This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
We are a leading provider of high-quality education and care, including early education and child care, back-up and family care solutions, and workforce education services that are designed to help families, employers and their employees solve the challenges of the modern workforce and thrive personally and
professionally. We provide services primarily under multi-year contracts with employers who offer early education and child care, back-up care, and educational advisory and other services as part of their employee benefits packages in an effort to support employees across life and career stages and to improve recruitment, employee engagement, productivity, retention and career advancement. As of June 30, 2022, we had more than 1,350 client relationships with employers across a diverse array of industries, including more than 200 Fortune 500 companies and more than 80 of Working Mother magazine’s 2021 “100 Best Companies.”
At June 30, 2022, we operated 1,014 early education and child
care centers and had the capacity to serve approximately 114,000 children and their families in the United States, the United Kingdom, the Netherlands, and India. At June 30, 2022, 992, or 98%, of our child care centers were open.
Our reportable segments are comprised of (1) full service center-based child care, (2) back-up care, and (3) educational advisory and other services. Full service center-based child care includes the traditional center-based early education and child care, preschool, and elementary education. Back-up care consists of center-based back-up child care, in-home care for children and adult/elder dependents, school-age camps, virtual tutoring, and self-sourced reimbursed care. Educational advisory and other services includes tuition assistance and student loan repayment program administration, workforce education, related educational advising, college
admissions advisory services, and an online marketplace for families and caregivers.
Since March 2020, our global operations have been significantly impacted by the COVID-19 pandemic and the measures undertaken in response thereto. During the early stages of the pandemic, most of our child care centers were temporarily closed. We responded by quickly adapting to the changing environment and focusing on health and safety, supporting clients and their essential frontline workers and pivoting to expand back-up care solutions for clients and employees to meet the surge in need and demand. While nearly all of our centers have subsequently re-opened, we continue to be impacted by the ongoing effects of COVID-19, including the resurgence of infections and variants of the virus, which have impacted center enrollment, back-up care use and the speed of our recovery, and by the challenges of managing precautionary and preventative
measures such as vaccination and masking mandates, virus exposures affecting our staff and families who attend our centers, and disrupted staff availability.
We will continue to monitor 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 strategic priorities to deliver high quality education and care services, connect across our service lines, extend our impact on new customers and clients, and preserve our strong culture. We have executed a number of strategic actions to strengthen our client partnerships and our employee value proposition to better position us as the service provider and employer of choice in our industry. As the early education industry continues to be impacted by a challenging labor market, we continue to invest, and expect to make future investments, in our employees
and build on what makes us an employer of choice. We have enhanced compensation and expanded employee benefits, increased the child care tuition subsidy, enhanced our mental health and wellness resources, and continue to champion for early educators through our Horizons Teacher Degree Program, where our employees can earn an associate or bachelor's degree in early childhood education at no-cost.
It remains difficult to predict the full impact of the pandemic and eventual recovery, but we remain committed to families, clients and our employees. We remain confident in our value proposition, 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. Our ability to fully return to the operating income levels at which we operated prior to COVID-19, and to continue to increase operating income in the future
will depend upon our ability to continue to regain and sustain the following characteristics of our business and our strategic growth priorities:
• maintenance and incremental growth of enrollment in our mature and ramping centers, and cost management in response to changes in enrollment in our centers;
• effective pricing strategies, including tuition increases that correlate with expected increases in personnel costs, including wages and benefits, and additional pricing actions to accommodate higher operating costs and the impact of persistent inflation;
• additional growth in expanded service offerings and cross-selling of services to clients;
• successful identification and integration of acquisitions and transitions of management of centers; and
•
successful management and improvement of underperforming centers.
On July 1, 2022, we completed the acquisition of the outstanding shares of Only About Children (“OAC”), a high-quality operator of early education and child care centers in Australia, for aggregate consideration of AUD$450 million. We paid approximately AUD$300 million (USD$207 million), net of cash acquired, and will pay an additional USD$106.5 million 18 months after closing. The initial purchase price was financed with cash on hand. OAC operates approximately 75 centers in Australia.
Results
of Operations
The following table sets forth statement of income data as a percentage of revenue for the three months ended June 30, 2022 and 2021:
(1)Adjusted
EBITDA, adjusted income from operations and adjusted net income are non-GAAP financial measures and are not determined in accordance with accounting principles generally accepted in the United States (“GAAP”). Refer to “Non-GAAP Financial Measures and Reconciliation” below for a reconciliation of these non-GAAP financial measures to their respective measures determined under GAAP and for information regarding our use of non-GAAP financial measures.
(1)Adjusted EBITDA, adjusted income from operations and adjusted net income are non-GAAP financial measures and are not determined in accordance with accounting principles generally accepted in the United States (“GAAP”). Refer to “Non-GAAP Financial Measures and Reconciliation” below for a reconciliation of these
non-GAAP financial measures to their respective measures determined under GAAP and for information regarding our use of non-GAAP financial measures.
Revenue. Revenue increased by $48.9 million, or 11%, to $490.3 million for the three months ended June 30, 2022 from $441.5 million for the same period in 2021. The following table summarizes the revenue and percentage of total revenue for each of our segments for the three months ended June 30, 2022 and 2021:
Revenue generated by the full service center-based child care segment in the three months ended June 30, 2022 increased by $36.9 million, or 11%, when compared to the same period in 2021. Revenue growth in this segment was primarily attributable to enrollment increases in our open child care centers and from the re-opening of our temporarily closed centers. Tuition revenue increased by $38.8 million, or 13%, when compared to the prior year, on a 16% increase in enrollment. While enrollment in our centers continues to improve, our centers continue to operate below pre-COVID-19 enrollment levels as the ongoing disruption of the pandemic and labor market challenges have slowed the recovery and impacted occupancy levels. We expect continued occupancy improvement throughout 2022 and into 2023. Additionally, during the three months ended June 30,
2022, $1.4 million was received from government programs related to tuition support and was recorded to revenue. Lower foreign currency exchange rates for our United Kingdom and Netherlands operations partially offset our revenue growth, which decreased 2022 tuition revenue by approximately 4%, or $12.6 million. Management fees and operating subsidies from employer sponsors decreased by $1.9 million, or 5%, primarily due to funding received from government support programs that reduced certain center operating costs, which impacted the related operating subsidies. During the three months ended June 30, 2022 and 2021, funding received from government support programs of $6.5 million and $2.8 million, respectively, reduced the operating subsidy revenue due from employers.
Revenue generated by back-up care services in the
three months ended June 30, 2022 increased by $10.2 million, or 13%, when compared to the same period in 2021. Revenue growth in the back-up care segment was primarily attributable to expanded sales to new clients, increased utilization of center-based and in-home back-up care from new and existing clients, and contributions from our various back-up use types.
Revenue generated by educational advisory and other services in the three months ended June 30, 2022 increased by $1.7 million, or 7%, when compared to the same period in the prior year. Revenue growth in this segment was primarily attributable to contributions from sales to new clients and increased utilization from existing clients.
Cost of Services. Cost of services increased
by $26.3 million, or 8%, to $361.8 million for the three months ended June 30, 2022 from $335.5 million for the same period in 2021.
Cost of services in the full service center-based child care segment increased by $16.8 million, or 6%, to $297.3 million in the three months ended June 30, 2022 when compared to the same period in 2021. The increase in cost of services was primarily associated with the enrollment increase in our centers and the re-opening of our temporarily closed centers. Personnel costs, which generally represent 70% of the costs for this segment, increased 8% primarily in connection with the enrollment growth at our centers. Funding received from government support programs reduced center operating expenses by $21.4 million in the second quarter of 2022, compared to $7.4 million in government funding received
in the second quarter of 2021. As noted above, a portion of the funding received from government support programs reduced the operating costs in certain employer-sponsored centers, which in turn reduced the operating subsidy revenue due from employers for the related child care centers by $6.5 million and $2.8 million in the three months ended June 30, 2022 and 2021, respectively.
Cost of services in the back-up care segment increased by $8.2 million, or 19%, to $50.7 million in the three months ended June 30, 2022, when compared to the prior year. The increase in cost of services is associated with the effects of a change in the revenue mix and the return to higher levels of center-based and in-home back-up care use in 2022 compared to more significant self-sourced reimbursed
care in the prior year period. The increase in cost of services included increased care provider fees generated by the increase in utilization levels of center-based and in-home back-up care over the prior year, and continued investment in personnel, marketing and technology to support our customer user experience and service delivery.
Cost of services in the educational advisory and other services segment increased by $1.3 million, or 10%, to $13.8 million in the three months ended June 30, 2022 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 increased by $22.5 million, or 21%, to $128.5 million for the three
months ended June 30, 2022 from $106.0 million for the same period in 2021. Gross profit margin was 26% of revenue for the three months ended June 30, 2022, an increase of approximately 2% compared to the three months ended June 30, 2021. The increase was primarily due to improved margins in the full service center-based child care segment from enrollment increases at open child care centers and from the re-opening of temporarily closed centers.
Selling, General and Administrative Expenses (“SGA”). SGA increased by $9.2 million, or 14%, to $73.7 million for the three months ended June 30,
2022 from $64.5 million for the same period in 2021, in order to support the business as it continues to re-ramp. SGA was 15.0% of revenue for the three months ended June 30, 2022, generally consistent with the same period in 2021.
Amortization of Intangible Assets.Amortization expense on intangible assets was $7.0 million for the three months ended June 30, 2022, a decrease from $7.5 million for the three months ended June 30, 2021, due to the use of the accelerated method of amortization for certain intangible assets and decreases from intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2021.
Income from Operations.Income from operations increased by $13.8 million, or 41%, to $47.8 million for the three months ended June 30, 2022 when compared to the prior year. The following table summarizes income from operations and percentage of revenue for each of our segments for the three months ended June 30, 2022 and 2021:
The increase in income from operations was due to the following:
•Income
from operations for the full service center-based child care segment increased $15.7 million, or 386%, in the three months ended June 30, 2022 when compared to the same period in 2021 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 incremental net contributions of approximately $12 million from government support programs that primarily reduced certain operating expenses.
•Income from operations for the back-up care segment increased $0.4 million, or 1%, in the three months ended June 30, 2022 when compared to the same period in 2021, as the service delivery mix continues to shift back towards pre-COVID-19 levels, with increasing utilization of traditional in-home and center-based back-up care and a decrease
in self-sourced reimbursed care compared to the prior year.
•Income from operations for the educational advisory and other services segment decreased $2.2 million, or 42%, in the three months ended June 30, 2022 when compared to the same period in 2021 due to investments in personnel, marketing and technology to support the growth of the segment.
Loss on Foreign Currency Forward Contracts. During thethree months ended June 30, 2022, in connection with the acquisition in Australia completed in July 2022, we entered into foreign currency forward contracts
with a total notional value of approximately AUD$320 million, which included the expected payments for the purchase price and for letters of credit used to guarantee certain lease arrangements, to mitigate the impact of foreign currency fluctuations between signing of the definitive purchase agreement on May 3, 2022 and closing. The cash flows associated with the business combination do not meet the criteria to be designated and accounted for as cash flow hedges and as such, foreign currency gains and losses are recorded on the consolidated statement of income. During the three months ended June 30, 2022, we recognized realized and unrealized losses of $5.9 million in relation to these forward contracts due to fluctuations in the Australian dollar.
Net
Interest Expense.Net interest expense decreased to $7.9 million for the three months ended June 30, 2022 from $9.6 million for the same period in 2021 due to decreases in the outstanding debt as a result of the November 2021 debt refinance as well as a decrease in the interest rates applicable to our debt. The weighted average interest rate for the term loans and revolving credit facility was 2.76% for three months ended June 30, 2022 and 3.06% for the three months ended June 30, 2021, inclusive of the effects of the interest rate swap arrangements prior to their maturity on October 31, 2021. Based on our current interest rate projections, we estimate that our overall weighted average interest rate will approximate 3.5%
for the remainder of 2022.
Income Tax Expense. We recorded income tax expense of $9.0 million during the three months ended June 30, 2022, at an effective income tax rate of 27%, compared to an income tax expense of $5.6 million during the three months ended June 30, 2021, at an effective income tax rate of 23%. 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 2021 due to the lower income before income tax and higher excess tax benefits. 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 matters 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, 2022 and 2021, the excess tax benefits reduced income tax expense by $0.7 million and $1.2 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% for the three months ended June 30, 2022 and 2021.
Adjusted EBITDA and Adjusted
Income from Operations.Adjusted EBITDA and adjusted income from operations increased $15.1 million, or 22%, and $16.3 million, or 48%, respectively, for the three months ended June 30, 2022 over the comparable period in 2021 primarily as a result of the increase in gross profit in the full service center-based child care segment.
Adjusted Net Income. Adjusted net income increased $12.3 million, or 41%, for the three months ended June 30, 2022 when
compared to the same period in 2021, primarily due to the increase in income from operations, partially offset by a higher effective tax rate.
Revenue. Revenue increased by $118.4 million, or 14%, to $1.0 billion for the six months ended June 30, 2022 from $0.8 billion for the same period in 2021. The following table summarizes the revenue and percentage of total revenue for each of our segments for the six months ended June 30, 2022 and 2021:
Revenue
generated by the full service center-based child care segment in the six months ended June 30, 2022 increased by $100.5 million, or 16%, when compared to the same period in 2021. Revenue growth in this segment was attributable to enrollment increases in our open centers and the re-opening of our temporarily closed centers. Tuition revenue increased by $108.8 million, or 19.8%, when compared to the prior year, on a 22% increase in enrollment. As noted above, while enrollment in our centers continues to improve, our centers continue to operate below pre-COVID-19 enrollment levels as the ongoing disruption of the pandemic, infection resurgences and labor market challenges have slowed the recovery and impacted occupancy levels. We expect continued occupancy improvement throughout 2022 and into 2023. Additionally, during the six months ended June 30, 2022, $3.4 million
was received from government programs related to tuition support and was recorded to revenue. Lower foreign currency exchange rates for our United Kingdom and Netherlands operations partially offset our revenue growth, which decreased 2022 tuition revenue by approximately 3%, or $16.7 million. Management fees and operating subsidies from employer sponsors decreased by $8.3 million, or 11%, primarily due to funding received from government support programs that reduced certain center operating costs, which impacted the related operating subsidies. During the six months ended June 30, 2022 and 2021, funding received from government support programs of $16.0 million and $5.7 million, respectively, reduced the operating subsidy revenue due from employers.
Revenue generated by back-up care services in the six months ended June 30,
2022 increased by $14.7 million, or 9%, when compared to the same period in 2021. Revenue growth in the back-up care segment was primarily attributable to expanded sales to new client, increased utilization of center-based and in-home back-up care from new and existing clients, and contributions from our various back-up use types.
Revenue generated by educational advisory and other services in the six months ended June 30, 2022 increased by $3.2 million, or 6%, when compared to the same period in the prior year. Revenue growth in this segment was primarily attributable to contributions from sales to new clients and increased utilization from existing clients.
Cost of Services. Cost of services increased $67.2 million, or 10%, to $712.2 million for the six months ended June 30,
2022 from $645.0 million for the same period in 2021.
Cost of services in the full service center-based child care segment increased $49.8 million, or 9%, to $591.5 million in the six months ended June 30, 2022 when compared to the same period in 2021. The increase in cost of services was primarily associated with the enrollment increase in our centers and the re-opening of our temporarily closed centers. Personnel costs increased 13% primarily in connection with the enrollment growth at our centers. Funding received from government support programs reduced center operating expenses by $46.7 million in 2022, compared to $17.0 million in government funding received in 2021. As noted above, a portion of the funding received from government support programs reduced the operating costs in certain employer-sponsored centers, which in turn reduced the operating subsidy revenue
due from employers for the related child care centers by $16.0 million and $5.7 million in the six months ended June 30, 2022 and 2021, respectively.
Cost of services in the back-up care segment increased $16.4 million, or 21%, to $95.2 million in the six months ended June 30, 2022, when compared to the prior year. The increase in cost of services is associated with the effects of a change in the revenue mix and the return to higher levels of center-based and in-home back-up care use in 2022 compared
to more significant self-sourced reimbursed care in the prior year period. The increase in cost of services included increased care provider fees generated by the increase in utilization levels of center-based and in-home back-up care over the prior year, and continued investment in personnel, marketing and technology to support our customer user experience and service delivery.
Cost of services in the educational advisory and other services segment increased by $1.0 million, or 4%, to $25.5 million in the six months ended June 30, 2022 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 increased $51.2 million,
or 27%, to $238.6 million for the six months ended June 30, 2022 from $187.3 million for the same period in 2021. Gross profit margin was 25% of revenue for the six months ended June 30, 2022 an increase of approximately 2% compared to the six months ended June 30, 2021. The increase was primarily due to improved margins in the full service center-based child care segment from enrollment increases at open child care centers and from the re-opening of temporarily closed centers.
Selling, General and Administrative Expenses. SGA increased $20.9 million, or 17%, to $145.4 million for the six months ended June 30, 2022 from $124.6 million for the same period in 2021, in order to support
the business as it continues to re-ramp. SGA was 15% of revenue for the six months ended June 30, 2022, generally consistent with the same period in 2021.
Amortization of Intangible Assets. Amortization expense on intangible assets was $14.2 million for the six months ended June 30, 2022, a decrease from $15.1 million for the six months ended June 30, 2021 due to decreases from certain intangible assets becoming fully amortized during the period, partially offset by increases from the acquisitions completed in 2021.
Income from Operations. Income from operations increased by $31.3 million, or 66%, to $79.0 million for the six months ended
June 30, 2022 when compared to the same period in 2021. The following table summarizes income from operations and percentage of revenue for each of our segments for the six months ended June 30, 2022 and 2021:
The
increase in income from operations was due to the following:
•Income from operations for the full service center-based child care segment increased $40.8 million, or 293%, in the six months ended June 30, 2022 when compared to the same period in 2021 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 incremental net contributions of approximately $23 million from government support programs that primarily reduced certain operating expenses.
•Income from operations for the back-up care segment decreased $6.4 million, or 12%, in the six months ended June 30, 2022 when compared to the same period in 2021, as the service delivery mix continues
to shift back towards pre-COVID-19 levels, with increasing utilization of traditional in-home and center-based back-up care and a decrease in self-sourced reimbursed care compared to the prior year.
•Income from operations for the educational advisory and other services segment decreased $3.1 million, or 32%, in the six months ended June 30, 2022 when compared to the same period in 2021 due to investments in personnel, marketing and technology to support the growth of the segment.
Loss on Foreign Currency Forward Contracts. During the six months ended June 30, 2022,in connection with the acquisition
in Australia completed in July 2022, we entered into foreign currency forward contracts with a total notional value of approximately AUD$320 million, which included the expected payments for the purchase price and for letters of credit used to guarantee certain lease arrangements, to mitigate the impact of foreign currency fluctuations between signing of the definitive purchase agreement on May 3, 2022 and closing. The cash flows associated with the business combination do not meet the criteria to be designated and accounted for as cash flow hedges and as such, foreign currency gains and losses are recorded on the consolidated statement of income. During the six months ended June 30, 2022, we recognized realized and unrealized losses of $5.9 million in relation to these forward
contracts due to fluctuations in the Australian dollar.
Net Interest Expense. Net interest expense decreased to $15.0 million for the six months ended June 30, 2022 from $18.6 million for the same period in 2021, due to decreased borrowings under 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 loan
and revolving credit facility were 2.55% and 3.06% for the six months ended June 30, 2022 and 2021, respectively.
Income Tax Expense. We recorded income tax expense of $13.7 million for the six months ended June 30, 2022 at an effective income tax rate of 24%, compared to an income tax expense of $3.2 million during the six months ended June 30, 2021, at an effective income tax rate of 11%. 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, 2022 and 2021, the excess tax benefit decreased income tax expense by $2.7 million and $5.1 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, 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. The effective income tax rate would have approximated 28% for the six months ended June 30, 2022 and 2021, prior to the inclusion of the excess tax benefit from stock-based compensation and other discrete items.
Adjusted
EBITDA and Adjusted Income from Operations. Adjusted EBITDA and adjusted income from operations increased $31.7 million, or 28%, and $33.8 million, or 71%, respectively, for the six months ended June 30, 2022 over the comparable period in 2021 primarily as a result of the increase in gross profit in the full service center-based child care segment.
Adjusted Net Income. Adjusted net income increased $26.1 million, or 60%, for the six months ended June 30, 2022 when compared to the same period in 2021, primarily due to the increase in income from operations, partially offset by a higher effective tax rate.
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:
Weighted
average common shares outstanding — diluted
59,252,869
61,106,792
59,334,107
61,216,383
Diluted adjusted earnings per common share
$
0.71
$
0.49
$
1.18
$
0.71
(a)Amortization
of intangible assets represents amortization expense, including quarterly amortization expense of $5.0 million associated with intangible assets recorded in connection with our going private transaction in May 2008.
(b)Stock-based compensation expense represents non-cash stock-based compensation expense in accordance with Accounting Standards Codification Topic 718, Compensation-Stock Compensation.
(c)During the three months ended June 30, 2022, we entered into foreign currency forward contracts for the purchase of Australian dollars to satisfy the purchase price of an acquisition completed in July 2022. A loss of $5.9 million resulting from fluctuations in foreign currency
rates was recognized during the three months ended June 30, 2022 in relation to these contracts.
(d)Other costs represents transaction costs incurred in connection with acquisitions.
(e)Represents income tax expense calculated on adjusted income before income tax at an effective tax rate of approximately 26% and 21% for the three and six months ended June 30, 2022
and 2021, respectively. The tax rate for 2022 represents a tax rate of approximately 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 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 and may not be comparable to other similarly titled measures. We believe the non-GAAP financial measures provide investors with useful information with respect to our historical operations. We present the non-GAAP financial measures as supplemental performance measures because we believe they facilitate a comparative assessment of our operating performance relative to our performance based on our results under GAAP, while isolating the effects of some items that vary from period to period. Specifically, adjusted EBITDA allows for an assessment of our operating performance and of our ability to service or incur indebtedness without the effect of non-cash charges, such as depreciation, amortization, stock-based compensation expense, and at times, non-recurring costs, such as loss on foreign currency forward contracts and transaction
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 be considered together with our consolidated financial statements, which are prepared in accordance with GAAP and included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We understand that although adjusted EBITDA, adjusted income from operations, adjusted net income and diluted adjusted earnings per common share are frequently used by securities analysts, lenders and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•adjusted
EBITDA, adjusted income from operations and adjusted net income do not fully reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•adjusted EBITDA, adjusted income from operations and adjusted net income do not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA, adjusted income from operations and adjusted net income do not reflect any cash requirements for such replacements.
Because
of these limitations, adjusted EBITDA, adjusted income from operations and adjusted net income should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
Liquidity and Capital Resources
Our primary cash requirements are for the ongoing operations of our existing early education and child care centers, back-up care, educational advisory and other services, the addition of new centers through development or acquisitions, and debt financing obligations. Our primary sources of liquidity are our existing cash, cash flows from operations, and borrowings available under our revolving credit facility. We had $270.4 million in cash ($276.7 million including restricted cash) at June 30, 2022, of which $19.5 million was
held in foreign jurisdictions, compared to $261.0 million in cash ($265.3 million including restricted cash) at December 31, 2021, of which $25.8 million was held in foreign jurisdictions. Operations outside of North America accounted for 25% and 27% of our consolidated revenue in the six months ended June 30, 2022 and 2021, respectively. The net impact on our liquidity from changes in foreign currency exchange rates was not material for the six months ended June 30, 2022 and 2021, 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 2022.
On July 1, 2022, we completed the acquisition of the outstanding shares of OAC, a child care operator in Australia, for aggregate consideration of AUD$450 million. We paid approximately AUD$300 million (USD$207 million), net of cash acquired, and will pay an additional USD$106.5 million 18 months after closing. The initial purchase price was financed with cash on hand. In addition, we funded AUD$14.1 million (USD$9.7 million) for cash-backed guarantees for leases that will be recorded as restricted cash on our consolidated balance sheet.
Our revolving credit facility is part of our senior secured credit facilities, which consist of term loans and a $400 million revolving credit facility. There were no borrowings outstanding on our revolving credit facility at June 30,
2022 and December 31, 2021. We expect to draw on the revolving credit facility following the closing of the acquisition of OAC.
We had a working capital deficit of $82.4 million and $81.9 million at June 30, 2022 and December 31, 2021, respectively. Our working capital deficit has primarily arisen from using cash 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 impacted while our center performance continues to ramp. As we focus on the enrollment and ramping of centers, we continue to prioritize investments that support current operations and strategic opportunities, as well as the principal and interest payments on our debt.
During
the six months ended June 30, 2022 and 2021, we participated in government support programs that were enacted in response to the economic impact of the COVID-19 pandemic, including certain tax deferrals, tax credits and federal block grant funding in the United States, as well as employee wage support in the United Kingdom. During the six months ended June 30, 2022 and 2021, $46.7 million and $17.0 million, respectively, was recorded as a reduction to cost of services in relation to these benefits, of which $16.0 million and $5.7 million, respectively, reduced the operating subsidy revenue due from employers for the related child care centers. Additionally, during the six months ended June 30, 2022, amounts received for
tuition support of $3.4 million were recorded to revenue. As of June 30, 2022 and December 31, 2021, $1.6 million and $3.3 million, respectively, was recorded in prepaid expenses and other current assets on the consolidated balance sheet for amounts due from government support programs. As of June 30, 2022 and December 31, 2021, $7.0 million and $3.9 million was recorded to other current liabilities related to government support received related to future periods, and as of June 30, 2022 and December 31, 2021, payroll tax deferrals of $7.0 million were recorded in accounts payable and accrued expenses on the consolidated balance sheet.
The
board of directors authorized a share repurchase program of up to $400 million of our outstanding common stock, effective December 16, 2021. The share repurchase program has no expiration date and replaced the prior June 2018 authorization, of which $0.2 million remained available thereunder. During the six months ended June 30, 2022, we repurchased 0.9 million shares for $84.2 million, and at June 30, 2022, $296.4 million remained available under the repurchase program. During the six months ended June 30, 2021, we repurchased 0.5 million shares for $70.3 million. All repurchased shares have been retired.
We believe that funds provided by operations, our existing cash balances, and borrowings available under our revolving
credit facility will be adequate to fund all obligations and liquidity requirements for at least the next 12 months. However, if we were to experience continued or renewed disruption from the COVID-19 pandemic or if we were to undertake any significant acquisitions or make investments in the purchase of facilities for new or existing centers, we could require financing beyond our existing cash and borrowing capacity, and it could be necessary for us to obtain additional debt or equity financing. We may not be able to obtain such financing on reasonable terms, if at all.
Cash, cash equivalents and restricted cash — beginning of period
$
265,281
$
388,465
Cash, cash equivalents and restricted cash — end of period
$
276,677
$
429,119
Cash
Provided by Operating Activities
Cash provided by operating activities was $125.8 million for the six months ended June 30, 2022, compared to $135.7 million for the same period in 2021. The decrease in cash provided by operations relates to lower cash provided by working capital arising from the timing of billings and payments when compared to the prior year and the payment of $5.4 million in contingent consideration during the six months ended June 30, 2022, partially offset by the increase in net income of $18.4 million.
Cash used in investing activities was $23.1 million for the six months ended June 30, 2022 compared to $37.7 million for the same period in 2021. The decrease in cash used in investing activities was primarily related to a lower volume of fixed asset additions and acquisitions in 2022, and a higher level of proceeds received from investments in 2022 when compared to the prior year. During the six months ended June 30, 2022, we invested $19.2 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 net investment of $28.5 million during the same period in the prior year. We used $3.3 million to acquire one center in the six months ended June 30,
2022, compared to $9.1 million used to acquire two centers as well as a camp and back-up care provider during the same period in 2021. Net proceeds received from debt securities and other investments were $4.0 million in the six months ended June 30, 2022, compared to net cash used in investments of $0.1 million in the prior year. Additionally, during the six months ended June 30, 2022 we used $4.6 million in cash to settle foreign currency arrangements, which did not occur in the prior year. We entered into foreign currency forward contracts in the second quarter of 2022 in advance of the acquisition completed in July 2022 in Australia.
Cash Used in Financing Activities
Cash used in
financing activities was $89.0 million for the six months ended June 30, 2022 compared to $56.7 million for the same period in 2021. The increase in cash used in financing activities in 2022 was primarily related to payments of contingent consideration for acquisitions of $13.9 million, which did not occur in 2021, and a decrease of $17.6 million in proceeds received from the exercise of stock options and the issuance and sale of restricted stock compared to the prior year due to lower volume of transactions. Proceeds from the exercise of stock options and the issuance and sale of restricted stock were $10.6 million and $28.2 million in the six months ended June 30, 2022 and 2021, respectively.
Debt
Our senior secured credit facilities
consist of a $600 million term loan B facility (“term loan B”), a $400 million term loan A facility (“term loan A”) and a $400 million multi-currency revolving credit facility.
Deferred financing costs and original issue discount
(7,011)
(7,604)
Total debt
984,989
992,396
Less
current maturities
(16,000)
(16,000)
Long-term debt
$
968,989
$
976,396
The seven year term loan B matures on November 23, 2028 and requires quarterly principal payments equal to 1% per annum of the original aggregate principal amount of the term loan B, with the remaining principal balance due at maturity. The five year term loan A matures on November
23, 2026 and requires quarterly principal payments equal to 2.5% per annum of the original aggregate principal amount of the term loan A in each of the first three years, 5.0% in the fourth year, and 7.5% in the fifth year. The remaining principal balance is due at maturity.
The revolving credit facility matures on May 26, 2026. There were no borrowings outstanding on the revolving credit facility at June 30, 2022 and December 31, 2021, with $400 million available for borrowing.
Borrowings under the credit facilities are subject to variable interest. We mitigate our interest rate exposure with interest rate cap agreements. In December 2021, the
Company entered into interest rate cap agreements with a total notional value of $900 million designated and accounted for as cash flow hedges. Interest rate cap agreements for $600 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2025, provide the Company with interest rate protection in the event the one-month LIBOR rate increases above 2.5%. Interest rate cap agreements for $300 million, which have a forward starting effective date of October 31, 2023 and expire on October 31, 2026, provide the Company with interest rate protection in the event
the one-month LIBOR rate increases above 3.0%.
In June 2020, the Company entered into interest rate cap agreements with a total notional value of $800 million. These interest rate cap agreements, designated and accounted for as cash flow hedges, provide us with interest rate protection in the event the one-month LIBOR rate increases above 1%. 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, and expire on October 31, 2023.
The weighted average interest rate for the term loans was 2.55% and 3.06% for the six months ended June 30, 2022 and 2021, respectively, including the impact of the cash flow hedges.
The term loan A and the revolving credit facility require Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum first lien net leverage ratio. A breach of this covenant is subject to certain equity cure rights. The credit agreement governing the senior secured credit facilities contains certain customary affirmative covenants and events of default. We were in compliance with our financial covenant at June 30,
2022. Refer to Note 6, Credit Arrangements and Debt Obligations, in our condensed consolidated financial statements for additional information on our debt and credit arrangements, and covenant requirements.
Critical Accounting Policies
For a discussion of our “Critical Accounting Policies,” refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our critical accounting policies since December 31, 2021.
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. We do not believe there have been material changes in our exposure to interest rate or foreign currency exchange rate fluctuations since December 31, 2021. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2021 for further information regarding market risk.
During the three months ended June 30, 2022, in connection with an acquisition in Australia completed in July 2022, we entered into foreign currency forward contracts
with a total notional value of approximately AUD$320 million to mitigate the impact of foreign currency fluctuations between signing of the definitive purchase agreement on May 3, 2022 and closing. During the three months ended June 30, 2022, we recognized realized and unrealized losses of $5.9 million in relation to these forward contracts due to fluctuations in the Australian dollar. See Note 6, Credit Arrangements and Debt Obligations—Derivative Financial Instruments, for additional information.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As of June 30, 2022, we conducted an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), regarding the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and that such disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2022.
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,
2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are, from time to time, subject to claims, suits, and matters arising in the ordinary course of business. Such claims have in the
past generally been covered by 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.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, which could adversely affect our business, financial condition and operating results. We believe that these risks and uncertainties include, but are not limited to, those disclosed in Part I, Item 1A, “Risk Factors,”
of our Annual Report on Form 10-K for the year ended December 31, 2021, including with respect to the ongoing impacts from the 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, could materially impair our business, financial condition or results of operations. There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The
table below sets forth information regarding purchases of our common stock during the three months ended June 30, 2022:
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)
(1) The
board of directors of the Company authorized a share repurchase program of up to $400 million of the Company’s outstanding common stock effective December 16, 2021. The share repurchase program has no expiration date. All repurchased shares have been retired.
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.
Schedules (or similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplemental copies of any of the omitted schedules (or similar attachments) upon request by the SEC.
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.
