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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
__________________________________________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number: 001-35780
__________________________________________________
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
__________________________________________________
| | | | | | | | | | | | | | |
Delaware | | | | 80-0188269 |
(State or other jurisdiction of incorporation) | | | | (I.R.S. Employer Identification Number) |
| | | | | | | | | | | | | | | | | |
2 Wells Avenue | | | | |
Newton, Massachusetts | | | | 02459 |
(Address of principal executive offices) | | | | (Zip code) |
Registrant’s telephone number, including area code: (617) 673-8000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | BFAM | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 26, 2022, there were 57,750,017 shares of common stock outstanding.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
FORM 10-Q
For the quarterly period ended September 30, 2022
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| (In thousands, except share data) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 32,604 | | | $ | 260,980 | |
Accounts receivable — net of allowance for credit losses of $3,044 and $3,006 at September 30, 2022 and December 31, 2021, respectively | 194,410 | | | 210,971 | |
Prepaid expenses and other current assets | 75,830 | | | 68,320 | |
| | | |
Total current assets | 302,844 | | | 540,271 | |
Fixed assets — net | 561,233 | | | 598,134 | |
Goodwill | 1,674,466 | | | 1,481,725 | |
Other intangible assets — net | 254,729 | | | 251,032 | |
Operating lease right-of-use assets | 795,903 | | | 696,425 | |
Other assets | 126,955 | | | 72,460 | |
Total assets | $ | 3,716,130 | | | $ | 3,640,047 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 16,000 | | | $ | 16,000 | |
Borrowings under revolving credit facility | 113,000 | | | — | |
Accounts payable and accrued expenses | 232,092 | | | 197,366 | |
Current portion of operating lease liabilities | 90,710 | | | 87,341 | |
Deferred revenue | 193,240 | | | 258,438 | |
Other current liabilities | 44,974 | | | 63,030 | |
Total current liabilities | 690,016 | | | 622,175 | |
Long-term debt — net | 965,284 | | | 976,396 | |
Operating lease liabilities | 804,556 | | | 703,911 | |
Other long-term liabilities | 196,734 | | | 100,091 | |
Deferred revenue | 9,954 | | | 9,689 | |
Deferred income taxes | 55,830 | | | 48,509 | |
Total liabilities | 2,722,374 | | | 2,460,771 | |
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value; 25,000,000 shares authorized; no shares issued or outstanding at September 30, 2022 and December 31, 2021 | — | | | — | |
Common stock, $0.001 par value; 475,000,000 shares authorized; 57,501,048 and 59,305,160 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 58 | | | 59 | |
Additional paid-in capital | 590,608 | | | 745,615 | |
Accumulated other comprehensive loss | (130,470) | | | (37,359) | |
Retained earnings | 533,560 | | | 470,961 | |
Total stockholders’ equity | 993,756 | | | 1,179,276 | |
Total liabilities and stockholders’ equity | $ | 3,716,130 | | | $ | 3,640,047 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In thousands, except share data) |
Revenue | $ | 540,215 | | | $ | 460,333 | | | $ | 1,490,965 | | | $ | 1,292,651 | |
Cost of services | 411,406 | | | 340,068 | | | 1,123,572 | | | 985,046 | |
Gross profit | 128,809 | | | 120,265 | | | 367,393 | | | 307,605 | |
Selling, general and administrative expenses | 80,812 | | | 67,135 | | | 226,231 | | | 191,703 | |
Amortization of intangible assets | 8,948 | | | 7,140 | | | 23,127 | | | 22,192 | |
| | | | | | | |
Income from operations | 39,049 | | | 45,990 | | | 118,035 | | | 93,710 | |
Loss on foreign currency forward contracts | — | | | — | | | (5,917) | | | — | |
Interest expense — net | (11,707) | | | (9,153) | | | (26,695) | | | (27,749) | |
Income before income tax | 27,342 | | | 36,837 | | | 85,423 | | | 65,961 | |
Income tax expense | (9,094) | | | (10,018) | | | (22,824) | | | (13,195) | |
Net income | $ | 18,248 | | | $ | 26,819 | | | $ | 62,599 | | | $ | 52,766 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Common stock — basic | $ | 0.32 | | | $ | 0.44 | | | $ | 1.06 | | | $ | 0.87 | |
Common stock — diluted | $ | 0.31 | | | $ | 0.44 | | | $ | 1.06 | | | $ | 0.86 | |
| | | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Common stock — basic | 57,664,895 | | | 60,218,090 | | | 58,624,221 | | | 60,454,855 | |
Common stock — diluted | 57,740,013 | | | 60,743,765 | | | 58,802,742 | | | 61,058,843 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In thousands) |
Net income | $ | 18,248 | | | $ | 26,819 | | | $ | 62,599 | | | $ | 52,766 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments | (67,483) | | | (14,634) | | | (130,834) | | | (13,935) | |
Unrealized gain on cash flow hedges and investments, net of tax | 14,016 | | | 924 | | | 37,723 | | | 3,640 | |
Total other comprehensive loss | (53,467) | | | (13,710) | | | (93,111) | | | (10,295) | |
Comprehensive income (loss) | $ | (35,219) | | | $ | 13,109 | | | $ | (30,512) | | | $ | 42,471 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2022 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | |
| | | | | | | | | | | | | |
| (In thousands, except share data) |
Balance at July 1, 2022 | 58,622,868 | | | $ | 59 | | | $ | 680,618 | | | $ | — | | | $ | (77,003) | | | $ | 515,312 | | | $ | 1,118,986 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | 7,514 | | | | | | | | | 7,514 | |
Issuance of common stock under the Equity Incentive Plan | 13,400 | | | — | | | 859 | | | | | | | | | 859 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (3,008) | | | — | | | (278) | | | | | | | | | (278) | |
Purchase of treasury stock | | | | | | | (98,106) | | | | | | | (98,106) | |
Retirement of treasury stock | (1,132,212) | | | (1) | | | (98,105) | | | 98,106 | | | | | | | — | |
Other comprehensive loss | | | | | | | | | (53,467) | | | | | (53,467) | |
Net income | | | | | | | | | | | 18,248 | | | 18,248 | |
Balance at September 30, 2022 | 57,501,048 | | | $ | 58 | | | $ | 590,608 | | | $ | — | | | $ | (130,470) | | | $ | 533,560 | | | $ | 993,756 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | |
| | | | | | | | | | | | | |
| (In thousands, except share data) |
Balance at July 1, 2021 | 60,278,756 | | | $ | 60 | | | $ | 868,289 | | | $ | — | | | $ | (23,654) | | | $ | 426,449 | | | $ | 1,271,144 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | 5,600 | | | | | | | | | 5,600 | |
Issuance of common stock under the Equity Incentive Plan | 51,895 | | | — | | | 3,640 | | | | | | | | | 3,640 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (2,036) | | | — | | | (287) | | | | | | | | | (287) | |
Purchase of treasury stock | | | | | | | (33,977) | | | | | | | (33,977) | |
Retirement of treasury stock | (236,510) | | | — | | | (33,977) | | | 33,977 | | | | | | | — | |
Other comprehensive loss | | | | | | | | | (13,710) | | | | | (13,710) | |
Net income | | | | | | | | | | | 26,819 | | | 26,819 | |
Balance at September 30, 2021 | 60,092,105 | | | $ | 60 | | | $ | 843,265 | | | $ | — | | | $ | (37,364) | | | $ | 453,268 | | | $ | 1,259,229 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | |
| | | | | | | | | | | | | |
| (In thousands, except share data) |
Balance at January 1, 2022 | 59,305,160 | | | $ | 59 | | | $ | 745,615 | | | $ | — | | | $ | (37,359) | | | $ | 470,961 | | | $ | 1,179,276 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | 21,282 | | | | | | | | | 21,282 | |
Issuance of common stock under the Equity Incentive Plan | 229,354 | | | 1 | | | 11,483 | | | | | | | | | 11,484 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (47,320) | | | — | | | (5,432) | | | | | | | | | (5,432) | |
Purchase of treasury stock | | | | | | | (182,342) | | | | | | | (182,342) | |
Retirement of treasury stock | (1,986,146) | | | (2) | | | (182,340) | | | 182,342 | | | | | | | — | |
Other comprehensive loss | | | | | | | | | (93,111) | | | | | (93,111) | |
Net income | | | | | | | | | | | 62,599 | | | 62,599 | |
Balance at September 30, 2022 | 57,501,048 | | | $ | 58 | | | $ | 590,608 | | | $ | — | | | $ | (130,470) | | | $ | 533,560 | | | $ | 993,756 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock, at Cost | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | |
| | | | | | | | | | | | | |
| (In thousands, except share data) |
Balance at January 1, 2021 | 60,466,168 | | | $ | 60 | | | $ | 910,304 | | | $ | — | | | $ | (27,069) | | | $ | 400,502 | | | $ | 1,283,797 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | 16,735 | | | | | | | | | 16,735 | |
Issuance of common stock under the Equity Incentive Plan | 423,456 | | | 1 | | | 27,977 | | | | | | | | | 27,978 | |
Shares received in net share settlement of stock option exercises and vesting of restricted stock | (46,009) | | | — | | | (7,429) | | | | | | | | | (7,429) | |
Purchase of treasury stock | | | | | | | (104,323) | | | | | | | (104,323) | |
Retirement of treasury stock | (751,510) | | | (1) | | | (104,322) | | | 104,323 | | | | | | | — | |
Other comprehensive loss | | | | | | | | | (10,295) | | | | | (10,295) | |
Net income | | | | | | | | | | | 52,766 | | | 52,766 | |
Balance at September 30, 2021 | 60,092,105 | | | $ | 60 | | | $ | 843,265 | | | $ | — | | | $ | (37,364) | | | $ | 453,268 | | | $ | 1,259,229 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 62,599 | | | $ | 52,766 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 77,958 | | | 82,858 | |
Stock-based compensation expense | 21,282 | | | 16,735 | |
Loss on foreign currency forward contracts | 5,917 | | | — | |
Deferred income taxes | (8,209) | | | 1,573 | |
Other non-cash adjustments — net | 1,894 | | | 3,369 | |
Changes in assets and liabilities: | | | |
Accounts receivable | 16,369 | | | 15,836 | |
Prepaid expenses and other current assets | (7,204) | | | (4,095) | |
Accounts payable and accrued expenses | 27,122 | | | 8,911 | |
Income taxes | (6,278) | | | (11,269) | |
Deferred revenue | (64,235) | | | 15,360 | |
Leases | 703 | | | (3,378) | |
Other assets | 11,453 | | | 3,233 | |
Other current and long-term liabilities | (8,393) | | | 3,348 | |
Net cash provided by operating activities | 130,978 | | | 185,247 | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of fixed assets | (48,228) | | | (47,350) | |
Proceeds from the disposal of fixed assets | 10,456 | | | 5,840 | |
Purchases of debt securities and other investments | (13,838) | | | (20,032) | |
Proceeds from the maturity of debt securities and sale of other investments | 16,009 | | | 17,730 | |
Settlement of foreign currency forward contracts | (5,917) | | | — | |
| | | |
Payments and settlements for acquisitions — net of cash acquired | (209,421) | | | (18,914) | |
Net cash used in investing activities | (250,939) | | | (62,726) | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | | |
Borrowings under revolving credit facility | 167,000 | | | — | |
Payments under revolving credit facility | (54,000) | | | — | |
Principal payments of long-term debt | (12,000) | | | (8,063) | |
Payments of debt issuance costs | — | | | (2,057) | |
Purchase of treasury stock | (182,570) | | | (102,184) | |
Proceeds from issuance of common stock upon exercise of options and restricted stock upon purchase | 11,412 | | | 31,820 | |
Taxes paid related to the net share settlement of stock options and restricted stock | (5,432) | | | (7,429) | |
| | | |
Payments of contingent consideration for acquisitions | (13,865) | | | (196) | |
Net cash used in financing activities | (89,455) | | | (88,109) | |
Effect of exchange rates on cash, cash equivalents and restricted cash | (4,018) | | | (2,120) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (213,434) | | | 32,292 | |
Cash, cash equivalents and restricted cash — beginning of period | 265,281 | | | 388,465 | |
Cash, cash equivalents and restricted cash — end of period | $ | 51,847 | | | $ | 420,757 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
| | | |
| (In thousands) |
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS: | | | |
Cash and cash equivalents | $ | 32,604 | | | $ | 412,402 | |
Restricted cash and cash equivalents, included in prepaid expenses and other current assets | 7,906 | | | 8,355 | |
Restricted cash and cash equivalents, included in other assets | 11,337 | | | — | |
Total cash, cash equivalents and restricted cash — end of period | $ | 51,847 | | | $ | 420,757 | |
| | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
Cash payments of interest | $ | 24,973 | | | $ | 25,193 | |
Cash payments of income taxes | $ | 38,013 | | | $ | 23,427 | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 104,809 | | | $ | 106,878 | |
| | | |
NON-CASH TRANSACTIONS: | | | |
Fixed asset purchases recorded in accounts payable and accrued expenses | $ | 2,121 | | | $ | 2,402 | |
Deferred or contingent consideration issued for acquisitions | $ | 97,653 | | | $ | 7,337 | |
Operating right-of-use assets obtained in exchange for operating lease liabilities — net | $ | 44,575 | | | $ | 46,653 | |
Restricted stock reclassified from other current liabilities to equity upon vesting | $ | 3,160 | | | $ | 4,178 | |
Treasury stock purchases in other current liabilities | $ | — | | | $ | 2,139 | |
See accompanying notes to condensed consolidated financial statements.
BRIGHT HORIZONS FAMILY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization — Bright Horizons Family Solutions Inc. (“Bright Horizons” or the “Company”) provides center-based early education and child care, 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, Australia, 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 acquired Only About Children, an operator of approximately 75 child care centers in Australia. Refer to Note 4, Acquisitions, for additional information.
Basis of Presentation — The accompanying unaudited condensed consolidated balance sheet as of September 30, 2022 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended September 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 September 30, 2022 and the condensed consolidated statements of income, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods ended September 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 $400 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 nine months ended September 30, 2022, the Company repurchased 2.0 million shares for $182.3 million. At September 30, 2022, $198.3 million remained available under the repurchase program. During the nine months ended September 30, 2021, 0.8 million shares were repurchased for $104.3 million. All repurchased shares have been retired.
Government Support — During the nine months ended September 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 nine months ended September 30, 2022 and 2021, $68.6 million and $32.2 million, respectively, was recorded as a reduction to cost of services in relation to these benefits, of which $25.6 million and $9.3 million, respectively, reduced the operating subsidy revenue due from employers for the related child care centers. Additionally during the nine months ended September 30, 2022, amounts received for tuition support of $4.6 million were recorded to revenue. As of September 30, 2022 and December 31, 2021, $2.9 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 September 30, 2022 and December 31, 2021, $6.1 million and $3.9 million, respectively, was recorded to other current liabilities related to government support received related to future periods, and as of September 30, 2022 and December 31, 2021, payroll tax deferrals of $7.6 million and $7.0 million, respectively, were recorded in accounts payable and accrued expenses on the consolidated balance sheet.
2. REVENUE RECOGNITION
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into segments and geographical regions. Revenue disaggregated by segment and geographical region was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | | | | |
| (In thousands) |
Three months ended September 30, 2022 | | | | | | | |
North America | $ | 243,747 | | | $ | 119,555 | | | $ | 31,053 | | | $ | 394,355 | |
International | 136,809 | | | 9,051 | | | — | | | 145,860 | |
| $ | 380,556 | | | $ | 128,606 | | | $ | 31,053 | | | $ | 540,215 | |
Three months ended September 30, 2021 | | | | | | | |
North America | $ | 221,297 | | | $ | 91,237 | | | $ | 27,253 | | | $ | 339,787 | |
International | 112,586 | | | 7,960 | | | — | | | 120,546 | |
| $ | 333,883 | | | $ | 99,197 | | | $ | 27,253 | | | $ | 460,333 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | | | | |
| (In thousands) |
Nine months ended September 30, 2022 | | | | | | | |
North America | $ | 744,806 | | | $ | 280,580 | | | $ | 83,997 | | | $ | 1,109,383 | |
International | 360,998 | | | 20,584 | | | — | | | 381,582 | |
| $ | 1,105,804 | | | $ | 301,164 | | | $ | 83,997 | | | $ | 1,490,965 | |
Nine months ended September 30, 2021 | | | | | | | |
North America | $ | 630,078 | | | $ | 239,079 | | | $ | 76,986 | | | $ | 946,143 | |
International | 328,551 | | | 17,957 | | | — | | | 346,508 | |
| $ | 958,629 | | | $ | 257,036 | | | $ | 76,986 | | | $ | 1,292,651 | |
The classification “North America” is comprised of the Company’s United States and Puerto Rico operations and the classification “International” includes the Company’s United Kingdom, Netherlands, Australia and India operations. On July 1, 2022, the Company acquired Only About Children, an operator of approximately 75 child care centers in Australia. Refer to Note 4, Acquisitions, for additional information.
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 nine months ended September 30, 2022 and 2021, $224.6 million and $169.2 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. LEASES
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, the Netherlands, and Australia. Most of the leases expire within 10 to 15 years and many contain renewal options and/or termination provisions. As of September 30, 2022 and December 31, 2021, there were no material finance leases.
Lease Expense
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (In thousands) |
Operating lease expense (1) | $ | 37,992 | | | $ | 33,358 | | | $ | 102,879 | | | $ | 100,635 | |
Variable lease expense (1) | 10,264 | | | 9,399 | | | 29,976 | | | 23,076 | |
Total lease expense | $ | 48,256 | | | $ | 42,757 | | | $ | 132,855 | | | $ | 123,711 | |
(1) Excludes short-term lease expense and sublease income, which were immaterial for the periods presented.
Other Information
The weighted average remaining lease term and the weighted average discount rate were as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
Weighted average remaining lease term (in years) | 11 | | 10 |
Weighted average discount rate | 6.7% | | 5.8% |
Maturity of Lease Liabilities
The following table summarizes the maturity of lease liabilities as of September 30, 2022:
| | | | | |
| Operating Leases |
| |
| (In thousands) |
Remainder of 2022 | $ | 23,811 | |
2023 | 148,016 | |
2024 | 140,222 | |
2025 | 129,354 | |
2026 | 121,992 | |
Thereafter | 709,667 | |
Total lease payments | 1,273,062 | |
Less imputed interest | (377,796) | |
Present value of lease liabilities | 895,266 | |
Less current portion of operating lease liabilities | (90,710) | |
Long-term operating lease liabilities | $ | 804,556 | |
As of September 30, 2022, the Company had entered into additional operating leases that have not yet commenced with total fixed payment obligations of $28.3 million. The leases are expected to commence between the fourth quarter of 2022 and the first quarter of 2023 and have initial lease terms of approximately 12 to 15 years.
4. ACQUISITIONS
The Company’s growth strategy includes expansion through strategic and synergistic acquisitions. The goodwill resulting from these acquisitions arises largely from synergies expected from combining the operations of the businesses acquired with 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.
Only About Children
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 with approximately 75 early education and child care centers, for aggregate consideration of AUD$450 million (USD$310 million), which was accounted for as a business combination. The Company paid approximately AUD$300 million (USD$207 million), net of cash acquired and subject to customary purchase price adjustments, and will pay an additional USD$106.5 million 18 months after closing. In October 2022, the Company reached an agreement with the sellers on the final net working capital, resulting in a refund of AUD$2.6 million (USD$1.8 million), which is expected to be received in the fourth quarter of 2022. The present value of the deferred consideration of AUD$141.8 million (USD$97.7 million) is included in other long-term liabilities and AUD$2.6 million (USD$1.8 million) receivable from the sellers related to working capital settlements is included in other current assets on the consolidated balance sheet.
During the nine months ended September 30, 2022, the Company incurred acquisition-related transaction costs of approximately $9.2 million, which are included in selling, general and administrative expenses. In addition, the Company recognized realized losses of $5.9 million in relation to foreign currency forward contracts for the purchase of Australian dollars entered into in connection with the acquisition. Refer to Note 6, Credit Arrangements and Debt Obligations, for additional information on the foreign currency forward contracts.
The purchase price for this acquisition has been allocated based on preliminary estimates of the fair values of the acquired assets and assumed liabilities at the date of acquisition as follows:
| | | | | |
| At acquisition date |
| |
| (In thousands) |
Cash | $ | 4,705 | |
Accounts receivable and prepaid expenses | 4,295 | |
Fixed assets | 21,702 | |
Goodwill | 283,466 | |
Intangible assets | 30,945 | |
Operating lease right of use assets | 156,678 | |
Total assets acquired | 501,791 | |
Accounts payable and accrued expenses | 17,991 | |
Deferred revenue and parent deposits | 6,809 | |
Deferred tax liabilities | 3,392 | |
Operating lease liabilities | 161,405 | |
Other long-term liabilities | 5,458 | |
Total liabilities assumed | 195,055 | |
Purchase price | $ | 306,736 | |
The Company recorded goodwill of $283.5 million related to the full service center-based child care segment, which will not be deductible for tax purposes. Intangible assets consist of customer relationships of $23.0 million that will be amortized over 6 years and trade names of $7.9 million that will be amortized over 11 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 September 30, 2022, the purchase price allocation for Only About Children remains open as the Company gathers additional information regarding the assets acquired and the liabilities assumed, primarily in relation to the valuation of intangibles, fixed assets, leases, and the Company’s assessment of tax related items.
The operating results for Only About Children are included in the consolidated results of operations from the date of acquisition. Only About Children contributed total revenue of $37.3 million during the three months ended September 30, 2022. Net income for the three months ended September 30, 2022 was not materially impacted by the acquisition of Only About Children.
The following table presents consolidated pro forma revenue as if the acquisition of Only About Children had occurred on January 1, 2021:
| | | | | | | | | | | |
| Pro forma (Unaudited) |
| Nine months ended September 30, 2022 | | Nine months ended September 30, 2021 |
| | | |
| (In thousands) |
Revenue | $ | 1,559,882 | | | $ | 1,400,372 | |
| | | |
Other than the impact of shifting the transaction costs incurred in 2022 to 2021, consolidated pro forma net income did not materially change from the reported results. In assessing the impact to the unaudited pro forma results we considered certain adjustments related to the acquisition, such as increased amortization expense related to the acquired intangible assets, adjusted depreciation associated with the fair value of the acquired fixed assets, shifting of transaction costs, as well as applying U.S. GAAP rent expense in accordance with Accounting Standards Codification 842, Leases.
Other 2022 Acquisitions
During the nine months ended September 30, 2022, the Company acquired one center in the Netherlands, which was accounted for as a business combination. This business was acquired for aggregate cash consideration of $3.3 million and consideration payable of $0.2 million. The Company recorded goodwill of $3.1 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 $0.5 million that will be amortized over four 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 September 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 business 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 nine months ended September 30, 2022, the Company paid contingent consideration of $19.1 million related to an acquisition completed in 2019 and contingent consideration of $0.2 million related to an acquisition completed in 2021. Of the total amounts paid of $19.3 million, $13.9 million had been recorded as a liability at the date of acquisition and is presented as cash used in financing activities in the consolidated statement of cash flows with remaining amounts reflected as cash used in operating activities.
2021 Acquisitions
During the year ended December 31, 2021, the Company acquired two centers as well as a school-age camp provider in the United States, 13 centers in the United Kingdom, and three centers in the Netherlands, in five separate business acquisitions, which were each accounted for as a business combination. These businesses were acquired for aggregate cash consideration of $53.2 million, net of cash acquired of $2.2 million, and consideration payable of $0.6 million. Additionally, the Company is subject to contingent consideration payments for two of these acquisitions, and recorded a fair value estimate of $7.3 million in relation to these contingent consideration arrangements at acquisition. Contingent consideration of up to $1.2 million was payable within one year from the date of acquisition if certain performance targets were met for one of the acquisitions, of which $0.8 million was paid 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 $39.5 million related to the full service center-based child care segment, of which $3.4 million will be deductible for tax purposes, and $14.6 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 $5.7 million that will be amortized over five years, as well as fixed assets of $10.1 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 September 30, 2022, the purchase price allocation for one of the acquisitions remains 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 $0.6 million for contingent consideration related to acquisitions completed in 2021, which had been recorded as a liability at the date of acquisition.
5. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Full service center-based child care | | Back-up care | | Educational advisory and other services | | Total |
| | | | | | | |
| (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at January 1, 2022 | $ | 1,233,096 | | | $ | 208,786 | | | $ | 39,843 | | | $ | 1,481,725 | |
Additions from acquisitions | 286,581 | | | — | | | — | | | 286,581 | |
| | | | | | | |
Effect of foreign currency translation | (89,264) | | | (4,576) | | | — | | | (93,840) | |
Balance at September 30, 2022 | $ | 1,430,413 | | | $ | 204,210 | | | $ | 39,843 | | | $ | 1,674,466 | |
The Company also has intangible assets, which consisted of the following at September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2022 | | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
| | | | | | | | |
| | | | (In thousands) |
Definite-lived intangible assets: | | | | | | | | |
Customer relationships | | 13 years | | $ | 414,770 | | | $ | (348,502) | | | $ | 66,268 | |
Trade names | | 6 years | | 18,257 | | | (9,549) | | | 8,708 | |
| | | | 433,027 | | | (358,051) | | | 74,976 | |
Indefinite-lived intangible assets: | | | | | | | | |
Trade names | | N/A | | 179,753 | | | — | | | 179,753 | |
| | | | $ | 612,780 | | | $ | (358,051) | | | $ | 254,729 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | Weighted average amortization period | | Cost | | Accumulated amortization | | Net carrying amount |
| | | | | | | | |
| | | | (In thousands) |
Definite-lived intangible assets: | | | | | | | | |
Customer relationships | | 14 years | | $ | 400,399 | | | $ | (332,571) | | | $ | 67,828 | |
Trade names | | 6 years | | 12,358 | | | (10,150) | | | 2,208 | |
| | | | 412,757 | | | (342,721) | | | 70,036 | |
Indefinite-lived intangible assets: | | | | | | | | |
Trade names | | N/A | | 180,996 | | | — | | | 180,996 | |
| | | | $ | 593,753 | | | $ | (342,721) | | | $ | 251,032 | |
The Company estimates that it will record amortization expense related to intangible assets existing as of September 30, 2022 as follows over the next five years:
| | | | | |
| Estimated amortization expense |
| |
| (In thousands) |
Remainder of 2022 | $ | 8,765 | |
2023 | $ | 32,762 | |
2024 | $ | 16,699 | |
2025 | $ | 5,270 | |
2026 | $ | 3,718 | |
6. CREDIT ARRANGEMENTS AND DEBT OBLIGATIONS
Senior Secured Credit Facilities
The Company’s senior secured credit facilities consist of a term loan B facility of $600 million (“term loan B”) and a term loan A facility of $400 million (“term loan A”), collectively the “term loan facilities” or “term loans,” as well as a $400 million multi-currency revolving credit facility (“revolving credit facility”). Long-term debt obligations were as follows: | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| | | |
| (In thousands) |
Term loan B | $ | 595,500 | | | $ | 600,000 | |
Term loan A | 392,500 | | | 400,000 | |
Deferred financing costs and original issue discount | (6,716) | | | (7,604) | |
Total debt | 981,284 | | | 992,396 | |
Less current maturities | (16,000) | | | (16,000) | |
Long-term debt | $ | |